Internet Payday Loans, Arbitration Clauses, and Agreements Not to Br...

You know a case before the New Mexico Court of Appeals is a big when  lots of out of town lawyers come to argue the case. And, so it was in the case of Andrea Felts, heard on January 19, 2011. Ms. Felts, a high school vice principal, took out  internet payday loans when going through a divorce, one at 684 percent per annum, and another at 730 percent. After paying back more than she borrowed in just a few months, she found a consumer lawyer to bring a class action against the two lenders, CLK Management and Cash Advance Network Inc., for unconscionability and unfair practices. One small detail….language buried in the click-through screens in her on-line “contract” said any disputes between the parties must be arbitrated, and also that she could not bring a class-action lawsuit.

In defending the suit, the lenders first denied they made or were connected to whoever made these loans. Next, they claimed to have tribal sovereign immunity. Next, they argued that they could not be brought to court because of the arbitration and class action waiver clause.  This is where it gets interesting! While it is unclear whether an agreement not to bring a class action is ever enforceable, in order for an arbitration clause to be enforceable in this context, the clause must be “clear and unmistakable” under U.S. Supreme Court case, Rent a Center v. Jackson.

The lawyers in the Felts case sparred extensively about whether a very lengthy arbitration clause in the contract was “clear and unmistakable.” Two lenders' lawyers argued that different 8 or 12-word clauses were the part that made the clause “clear and unmistakable.”One offered different “clear and unmistakable” language than he had identified as clear and unmistakeable in his previously- filed brief. One 168-word sentence in the arbitration clause provoked an exchange between Judge Cynthia Fry and an Omaha attorney defending one of the loan companies.

        "So you're saying it (the relevant wording) ends at the comma ... not at the period that comes some distance later?" Fry asked.
        "Yes, your honor," Messineo said.
        "That's pretty hairsplitting if you ask me," Fry responded.

The clause in question has18 commas and seven places where the word "or" appears.         

As most readers likely know, payday lenders hold a borrower's post-dated check or tap directly into his or her bank account to withdraw the money on payday. With most traditional loans, the principal and interest are paid down in regular installments. With a payday loan, however, the borrower must pay off the whole loan on the next payday. That's often impossible, so people repeatedly pay the fees with nothing going to the principal. Also, many of the loans are set up procedurally so that it is difficult to pay off the whole loan even if you want to. 

A New Mexico statute allows payday lenders to charge up to 417 percent annual interest. But as Felts' situation shows, interent payday loan companies feel they need not comply with state laws.