Payday Loans: Shrewd Business Or Predatory Lending? - CORE

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University of Minnesota Law SchoolScholarship RepositoryMinnesota Law Review2002Payday Loans: Shrewd Business or PredatoryLending?Creola JohnsonFollow this and additional works at: https://scholarship.law.umn.edu/mlrPart of the Law CommonsRecommended CitationJohnson, Creola, "Payday Loans: Shrewd Business or Predatory Lending?" (2002). Minnesota Law Review. 744.https://scholarship.law.umn.edu/mlr/744This Article is brought to you for free and open access by the University of Minnesota Law School. It has been accepted for inclusion in Minnesota LawReview collection by an authorized administrator of the Scholarship Repository. For more information, please contact lenzx009@umn.edu.

Payday Loans:Shrewd Business or Predatory Lending?Creola Johnson tI.The Nature of Payday Lending .8A. What Are Payday Loans and Who Uses Them? . . . . . . 9B. Payday Loans: Ordinary Check-Cashing Services orLending M oney? . . . . . . . . . . . . . . . . . . . . . . . . . . 121. Payday Loans Are Covered by the Truth inLending Act .132. Disguising Payday Loans Through ShamTransactions .18II. Criticisms of the Payday Loan Industry .25A. Unfair and Unlawful Practices Before or AtContract Form ation .261. The Cost of Payday Lending: Triple-DigitInterest Rates .262. Ohio Survey Shows Lenders Fail to ProvideBasic Inform ation .32B. Egregious Practices Post-Consummation . 551. The Debt Treadmill: Rollovers .552. Inappropriate Collection Practices .77III. Economic Realities and Current Law Permit ConsumerE xploitation .97A. Demographic Data About Payday Loan Customers . 98t Assistant Professor of Law, The Ohio State University Moritz Collegeof Law. The author is grateful for thoughtful comments provided by RichardAlderman, Patrick Bauer, Douglas Berman, John Caskey, Ruth Colker,Thomas Crandall, Jean Ann Fox, Arthur Greenbaum, Michael Greenfield,Dennis Herrington, Louis Jacobs, Kathleen Keest, Robert Lawless, AlanMichaels, Mary Dee Pridgen, Allan Samansky, Deborah Schmedemann, andDouglas Whaley. The author received invaluable research assistance andsecretarial support from Loraine Brannon, Kamau Edwards, Robert Feigel,Jeffery Harris, Denean Hill, Raymond Keyser, Arleesia McDonald, CarolPeirano, James Sarconi, and Michele Whetzel-Newton.Thanks to theUniversity Seed Grant Program at The Ohio State University for providingthe funding for the author's study of payday lenders in Franklin County, Ohio.

MINNESOTA LAW REVIEW[Vol 87:1B. Packaging Payday Loans to Take Advantage ofGaps in Applicable Law .1031. Exploiting Ambiguities in State Law .1042. Rent-A-Bank: Evasive Partnerships withTraditional Banks .105IV. Proposed Federal Regulation .116A. Economic Theory Justifies Regulation of thePayday Loan Industry .117B. Why State-by-State Regulation Would BeIn adequate .122C. Minimum Consumer Protections .133INTRODUCTIONPayday loans are extremely high-interest, short-term loansoffered to cash-strapped consumers. Some of the problems withpayday loans can be illustrated succinctly by the experience ofone payday loan customer, Leticia Ortega.' Realizing that hernext payday was two weeks away, Ortega worried about howshe was going to get enough cash to pay overdue telephone andelectric bills.2 Then Ortega, a cashier in San Antonio, Texas,spotted an advertisement by National Money Service in a localweekly newspaper. 3 National Money Service charged her a 904interest fee for a 300 loan, due by her next payday.Calculated on an annual percentage rate (APR) basis, this feeamounts to an APR of 780%. 5 When the loan's due datearrived, Ortega did not have sufficient cash to repay the entireloan.6 Consequently, for almost a year, National Money Service1. Ortega is a typical payday loan customer. For further explanation asto why she is considered a typical payday loan customer, see discussion infraPart I.B.2. Adam Geller, Payday May Day: Short-Term Lenders Under Fire,Hous. CHRON., Jan. 26, 2001, at B1,available at 2001 WL 2995313.3.Id.4.Id.5. The court in Cashback Catalog Sales, Inc. v. Price, 102 F. Supp. 2d1375, 1379 n.3 (S.D. Ga. 2000) set forth the formula for calculating an APR.Based on a fifty-two week year with "R" representing the APR, "1" the financecharge, "2" the term (weeks) of the loan, and "P"the loan principle: (Rx P/52)T L Applying this formula to Ortega's loan yields the following calculationand result: 1. (Rx 300 / 52) 2 90. 2. ( 300R /52) 2 90. 3. 5.77R x 2 90. 4. 11.54R 90. 5. R 90 /11.54. 6. R 7.80. Accordingly, Ortega'sloan carried an APR of 780%.6.Geller, supra note 2.

2002]PAYDAY LOANSdebited Ortega's bank account every two weeks in the amountof 90 as interest to "roll over" the loan (i.e., extend the duedate). 7 Because none of the 90 interest payments counted asprincipal, Ortega still owed National Money Service 300 eventhough she had paid 1800 in interest charges. 8 Subsequently,Ortega filed a complaint against National Money Service withthe state and learned that Texas usury law restricts lendingcharges. 9 Because it had partnered with a bank located inDelaware, however, National Money Service claimed it was notsubject to Texas usury law but could instead issue payday loanscharging the maximum interest rate allowed under Delawarelaw, the bank's home state. 10 This lawsuit is still pending.Ortega's experience with National Money Service brings tolight three of the major criticisms lodged against the paydayloan industry."1 First, because payday lenders charge feesconstituting extremely high-interest rates, these lenders aremodern-day loan sharks. 12 Second, because the payday loanbusiness model requires payment of the loan in full and doesnot allow partial payments or renewal fees to reduce the7. Id.8. Id.9. Id. Under Texas's consumer loan law, a lender can charge up to 15.60 for a fourteen-day loan of 300. See 7 TEX. ADMIN. CODE § 1.605(c)(West 2002) (containing an exhibit that "provides examples of the maximumauthorized rates for loans made under Texas Finance Code"). The lendercannot renew or roll over a loan if doing so results in charges exceeding thatmaximum permitted fee. See id. § 1.605(f)(1).10. Geller, supra note 2. The Delaware bank is the County Bank ofRehoboth Beach. Id.11. The Community Financial Services Association of America, a paydaylending industry trade group, operates a website that responds to thesecriticisms at .html.12. See Jean Ann Fox, What Does It Take to Be a Loan Shark in 1998? AReport on the Payday Loan Industry, in CONSUMER FINANCIAL SERVICESLITIGATION 1998, at 987, 990 (PLI Corporate Law & Practice Course,Handbook Series No. B-1047, 1998) (comparing salary lenders, who wereconsidered loan sharks at the beginning of the twentieth century, with paydaylenders), available at WL 772 PLI/Comm 987; Lisa Blaylock Moss, Note,Modern Day Loan Sharking: Deferred Presentment Transactions & the Needfor Regulation, 51 ALA. L. REV. 1725, 1725 (2000) ("[Mlodern day 'loan sharks'are making short-term loans at usurious interest rates to consumers under theguise of various 'deferred presentment transactions."'); Press Release,Consumer Federation of America, Payday Lenders Charge Exorbitant InterestRates to Cash-Strapped Consumers (Nov. 10, 1998), at http://www.consumerfed.org/loansharkpr.pdf.

MINNESOTA LAW REVIEW[Vol 87:1principal, payday lenders trap consumers in a vicious cycle ofindebtedness. 13 Third, payday lenders are partnering withnational banks in order to take advantage of a loophole infederal banking law that allows them to charge rates in excess14of state law.Disguising payday loans, threatening criminal prosecution,and collecting excessive damages are among the other majorcomplaints lodged against the industry. To evade compliancewith state usury limits and federal and state disclosurerequirements, payday lenders in some localities disguise thepayday loan transaction with a layer of subterfuge such asselling advertisements to people who only need cash. 15 Forexample, a customer pays a lender a 33 fee for a 100 cashloan and promises to repay that amount in two weeks in returnfor the 100 and the opportunity to place an advertisementsuch as "Go Cowboys" in a paper circulated only to the lender'scustomers.16 Once a customer obtains a loan and has difficultyrepaying it, many payday lenders intimidate customers bythreatening to have them prosecuted for the crime of passingbad checks because they lacked sufficient funds in their bankaccounts to cover the checks.17 Many payday lenders are goingbeyond threats and are filing complaints with prosecutingattorneys or are having customers arrested. 8 Moreover, incivil lawsuits against their customers, some payday lenderstake advantage of state statutes designed to compensatevictims of bad-check crimes to collect treble damages plus courtcosts and attorney's fees.' 9 In response to complaints about theforegoing practices, payday lenders contend that these cited13. See discussion infra Part II.B.1.14. See Barbara A. Rehm, Tanoue Seeks to Halt 'Renting' of Charters toPayday Loan Firms, AM. BANKER, June 14, 2000, at 4 ("Federal DepositInsurance Corp. Chairman Donna Tanoue . . urged Congress to crack downon banks that are so eager for fee income they 'rent' their charters to paydayloan companies."), available at 2000 WL 3362278; see also discussion infraPart III.B.2.15. See discussion infra Part I.B.2.a.16. Lynn Drysdale & Kathleen E. Keest, The Two-Tiered ConsumerFinancialServices Marketplace: The Fringe Banking System and Its Challengeto Current Thinking About the Role of Usury Laws in Today's Society, 51 S.C.L. REV. 589, 604 (2000).17. See discussion infra Part II.B.2.d.18. See id.19.See infra Part III.B.2.a.

20021PAYDAY LOANSpractices are rare and are perpetrated by only a small minorityof lenders.While this Article does not conclude that every paydaylender is predatory, it establishes that a large number ofpayday lenders engage in predatory practices. A predatorylender is one who, for personal profit, takes advantage ofanother by unfair, albeit technically legal, means. 20 In thisArticle, payday lenders are labeled predators because they reapgenerous profits 2' by taking advantage of consumers throughmeans that are not only grossly unfair but, in many cases, alsoentirely unlawful. This conclusion is based on the results of asurvey conducted by the author as well as investigationsperformed by state regulators and consumer advocacy groups.The survey conducted focused on payday lenders in Ohio (OhioSurvey) and is unique in that it is the first where surveyorsactually obtained payday loans and attempted to rescind them.Contrary to the industry's contention, the Ohio Survey20. See Hilary B. Miller, Payday Loans and Predatory Lending, inCONSUMER FINANCIAL SERVICES LITIGATION 2001, at 113, 127-28 (PLICorporate Law & Practice Course, Handbook Series No. B-1242, 2001)(discussing what some consumer groups consider to be predatory loans byusing several criteria, including high costs), available at WL 1242 PLI/Corp113; John Rao, Fair Housing: Predatory Loan Practices, in 1 CIL RIGHTSSECTION, at 349 (ATLA Annual Convention Reference Materials, July 2001)(defining predatory lending as the "practice of extending credit on unfairterms"), available at WL 1 Ann. 2001 ATLA-CLE 349.21. See, e.g., Kari Lydersen, Payday Profiteers:Payday Lenders Target theWorking Poor, MULTINATIONAL MONITOR, Oct. 1, 2001, at 9 (stating that FirstCash Financial Services, Inc., reported a 54% increase in profits during thefirst six months of 2001), available at 2001 WL 15520552; Teresa DixonMurray, Quick Cash with a Catch, PLAIN DEALER (Cleveland), Sept. 23, 2001,at G1 (stating that the largest payday lenders reported "at least a 50 percentincrease in revenues in the first half of 2001"), available at 2001 WL20551086; Compl., Sec. & Exch. Comm'n v. Ace Payday Plus, LLC, No. 1-0214 (S.D. Fla. filed Mar. 19, 2002) (asserting20858-Civ.-Ungaro-Benagesvarious violations of securities laws by Ace, the largest check-cashing companythat offers payday loans, and stating that Ace's estimated earnings from itspayday loan operations to yield "an average of up to 360% profit per year" andits check cashing operations to yield "up to 720% per year"),Payday mplr17422.htm.must be earning generous profits because they are trying to attract financialinvestors by promising a 20% return on their investment. See, e.g., SECBrings Emergency Enforcement Action Against Florida Check CashingBusiness and Affiliates, SEC NEWS DIG., (U.S. Sec. & Exch. Comm'n,Washington, D.C.) Mar. 20, 2002, availableat 2002 WL 10534114. For furtherdiscussion, see infra note 367 and accompanying text.

MINNESOTA LAW REVIEW[Vol 87:1demonstrates widespread noncompliance with consumerprotection laws and the industry's own self-regulatoryguidelines. The totality of results of the Ohio Survey and otherinvestigations clearly exposes the payday loan industry aspredatory.While this Article discusses unlawful paydaylending practices, other technically legal practices discussedherein frustrate the purposes of state and federal consumerprotection laws even though the practices might becharacterized as merely shrewd business conduct necessarilyattendant to capitalism. These technically legal practices existwithin loopholes that generate both excessive profits for paydaylenders and adverse consumer effects entirely unintended byresponsible legislative bodies.As a result, this Articleconcludes the payday loan industry needs to be federallyregulated.Part I of this Article explains the characteristics of atypical payday loan transaction and the characteristics ofconsumers in need of payday loans. 22It provides thebackground information necessary to appreciate why paydaylending practices evoke strong condemnation from consumerprotection advocates and concerned lawmakers. By refutingthe frequent industry assertion that payday loans are merelyservices provided to consumers, Part I further establishes thatpayday loans are a form of consumer credit. 23 The credit labelis highly important. Because payday loans constitute a form ofcredit, borrowers should be afforded legal protectionscomparable to those available to users of traditional forms of24consumer credit.Part II of this Article describes the unfair and unlawfullending practices permeating the payday loan industry andanalyzes how they violate various laws. 25 Using the results ofthe Ohio Survey and other studies, Part II details theexorbitant interest charges payday lenders have managed tocollect from their borrowers. It further describes the unlawfulmeans employed by payday lenders to mislead consumers about22. See discussion infra Part I.A.23. See discussion infra Part I.B.24. Middle- and upper-class Americans are not subject to these abusivecollection practices when they default on credit card debts. Payday loancustomers should receive comparable protection.25. See discussion infra Part II.A.

2002]PAYDAY LOANSthe cost of credit, thereby enticing them into a loan transaction.Part II also examines common egregious practices following theconsummation of the loan. These practices include "rollover"terms that trap consumers like Ortega in a permanent cycle ofdebt and collection practices that subject defaulting borrowersto both punitive sanctions through the imposition of trebledamages and criminal sanctions through bad-checkprosecutions.Part III of this Article explains how the payday lendingindustry has managed to thrive despite the egregioustreatment of its borrowers. 26 This section first exploresdemographic data demonstrating that payday loan customersare particularly susceptible to oppressive loan terms andcollection practices because they lack access to traditionalforms of credit. Part III further describes how payday lendersexploit ambiguities in state law and federal banking law totake full advantage of their customers' lack of financial options.Part III highlights the recent trend among payday lenders touse "rent-a-bank" partnerships with traditional banks to27charge fees higher than those allowed by state law.Part IV argues for a comprehensive system of federal26. See discussion infra Part III.B.27. See discussion infra Part III.B.2. Payday lenders are aggressivelyseeking banks for partnership arrangements because, under federal bankinglaw, a payday lender may charge interest at the maximum rate allowed by abank's home state, instead of being limited by a lower rate permitted in thestate where the customer resides. Id. This practice, known as "rent-a-bank,"is the basis for National Money's claim that it did not violate Texas's feelimitation of 15.60 or rollover limitations when it collected 1800 in fees on a 300 loan to Ortega. See supra note 10 and accompanying text. Part Idebunks the payday lenders' claim that federal law preempts state usury lawto the extent that the payday lender, rather than the bank, has thepreponderant economic role in the payday lending operation. Federal bankingregulators have warned banks about partnering with payday lenders and donot support rent-a-bank because of concerns over consumer protection issuesand banking safety and soundness risks. Press Release, Office of theComptroller of the Currency and Office of Thrift Supervision, Agencies UrgeBanks and Thrifts to Evaluate Risks with Vendors Engaged in PracticesViewed as Abusive to Customers (Nov. 27, 2000) (indicating that OCC andOTS "alerted national banks and federal thrifts that the agencies havesignificant safety and soundness, compliance and consumer protectionconcerns with banks and thrifts entering into contractual arrangements withvendors to fund so-called 'title loans' and 'payday loans'"), available at 2000WL 1740418, at *1. For further discussion, see infra notes 526-30 andaccompanying text.

MINNESOTA LAW REVIEW[Vol 87:1regulations to protect consumers from the rampantoverreaching that is common in today's payday loantransactions. 28 This Article concludes with recommendationsfor a payday lending statute that protects consumers frompredatory payday lending practices and that enables consumersto exit the subprime lending market, while protecting the29legitimate interests of payday lenders.I. THE NATURE OF PAYDAY LENDINGPayday lenders are central figures in the fringe bankingindustry, which has arisen to serve consumers with low-tomoderate incomes. 30 In the book Fringe Banking: CheckCashing Outlets, Pawnshops, and the Poor, Professor John P.Caskey first described the nationwide proliferation of fringebanks, companies that offer credit products to consumersexcluded from mainstream banking services.Because ofwidespread bank branch closings in poor and minorityneighborhoods, these consumers lack access to traditionalforms of credit. 31 Only a small number of check-cashing outletsissued payday loans when Professor Caskey wrote FringeBanking.32 He stated, however, that if check-cashing outlets28. See infra Part IV.B (discussing the ineffectiveness of existing state lawand positing that Congress needs to set minimum consumer protections).While banning payday loans is an option, it is not a viable option given theconsumer demand for the loans and the aggressive lobbying efforts of paydaylenders.29. See infra notes 719-62 and accompanying text.30.Melissa Allison, Regulators Leave Locations up to Banks, CHI. TRIB.,Nov. 25, 2001, § 5, at 1. Lending volume is the primary factor dictating thenumber of bank branches in a given area. Id. This reality results in fewerbank branches in low-income and minority neighborhoods and more paydayloan companies since payday loan companies typically cost less to operate andgenerate more income than a typical bank branch. Id.31.See JOHN P. CASKEY, FRINGE BANKING: CHECK-CASHING OUTLETS,PAWNSHOPS, AND THE POOR 6-7, 70-71, 90-97 (1994); Michael A. Stegman,Banking the Unbanked: Untapped Market Opportunities for North Carolina'sFinancial Institutions, 5 N.C. BANKING INST. 23, 28 (2001) ("The core of this'fringe banking' industry, as it is commonly referred to by consumer advocates,is a national network of check cashing centers and payday lenders .).32. CASKEY, supra note 31, at 59. In his book, Professor Caskey describes'salary lenders," the forerunners of today's payday lenders. See id. at 31-32.In a typical arrangement, an unlicensed lender would make a loan by"purchasing" a worker's next paycheck at a discount. Id. Salary lendersclaimed they were not lending but were purchasing property. Id. at 30, 32.Many states adopted small loan laws to regulate this practice. Id.

2002]PAYDAY LOANSregularly issued payday loans, a strong case would exist "forfairly extensive regulations and monitoring" of check-cashingoutlets. 33 While Professor Caskey's 1994 book did not elaborateon the point, this Article explains why he was correct to makethat assertion. To appreciate why payday lending practicesdeserve federal regulatory supervision, one must firstunderstand how a typical payday loan transaction operates,and, second, how these transactions qualify as a form ofconsumer credit rather than merely a contract for checkcashing services. In this regard, section A provides a generaldescription of the common loan terms and a brief description oftypical payday loan borrowers. Section B then explores theconsiderable authority that firmly establishes payday loans asa form of consumer credit.A. WHAT ARE PAYDAY LOANS AND WHO USES THEM?Payday loans are known by various names, includingpayday advances, deferred deposit loans, and cash advanceloans. 34 To apply for a loan, a consumer usually needs topresent a driver's license, pay stub, bank statement, telephonebill, and checkbook. 35 Payday lenders advertise that consumerscan obtain, in minutes, payday loans without hassles or creditchecks. 36 Assuming a consumer qualifies for a payday loan, a33. Id. at 124 n.11.34. Open-End Credit, 65 Fed. Reg. 17,129 (Mar. 31, 2000) (to be codifiedat 12 C.F.R. pt. 226) (indicating that payday loans "may also be known as'cash advance loans,' 'check advance loans,' 'postdated check loans,' 'delayeddeposit checks,' or 'deferred deposit checks'); Fox, supra note 12, at 989(indicating that small, short-term consumer loans "go by a variety of names:'payday loans,' 'cash advance loans,' 'check advance loans,' 'post-dated checkloans' or 'delayed deposit check loans").35. This list of documents is based on the Ohio Survey results. See alsoFox, supra note 12, at 989 (noting that "recent pay stubs, bank statements,photo identification, car registration, several months' telephone bills andutility bills" are the typically required documents); Dewanna Lofton, Is ItLegalized Loan Sharking, or Help for Those with Nowhere Else to Go?, COM.APPEAL (Memphis), Sept. 3, 2000, at DS1 ("Most [payday lenders] require thatborrowers bring a driver's license or state-issued photo ID, a recent pay stub,telephone bill, bank statement and checkbook with pre-printed checks."),available at 2000 WL 24146185.36. Drysdale & Keest, supra note 16, at 606 ("[It is handy, quick, andhassle-free; there are no obstacles such as bad credit records."); Daniel A.Edelman, Payday Loans: Big Interest Rates and Little Regulation, 11 LOY.CONSUMER L. REV. 174, 174 (1999) (indicating that the lack of a credit check isa feature that "makes these loans attractive to those who have, or think they

MINNESOTA LAW REVIEW[Vol 87:1nontraditional lender 37 makes a small cash advance (rangingfrom 50 to 1000) to the consumer in exchange for theconsumer's post-dated personal check written for the amount ofthe loan plus a fee. 38 Instead of taking a post-dated check,some lenders require the consumer to authorize a debit to theconsumer's bank account when the loan is due. 39 Because thelender holds the check until the consumer's next payday, theusual term of the loan is up to two weeks. 40 The lender thenattempts to cash the check unless the customer repays the loanin full and reclaims the post-dated check, pays a fee to "rollover" or extend the loan's due date for another two weeks, or, instates that prohibit rollovers, refinances the loan by paying a41fee.Assuming the customer cannot repay the loan by its duedate and must roll over the loan, the customer pays a feeusually equal to the initial borrowing fee, 42 further increasinghave, bad credit").As revealed in the Ohio Survey, contrary to theirrepresentations, most lenders conduct a credit check using Tele-Track, a creditreporting agency for risky borrowers.See infra notes 306-08 andaccompanying text.37. Besides companies that only issue payday loans, check-cashingoutlets, retail stores, and pawn shops are also offering the loans. Fox, supranote 12, at 989. In the Ohio Survey, a liquor store, Great Western Beverage,offered payday loans. As indicated in the introduction, traditional banks arenow in the payday loan business.38. Smith v. Check-N-Go, Inc., 200 F.3d 511, 513 (7th Cir. 1999) ("A'payday loan' is a short-term loan that is to be repaid on the borrower's nextpayday."); Drysdale & Keest, supra note 16, at 600-01.39. Drysdale & Keest, supra note 16, at 601 ("Some transactions usedelayed automatic debit agreements instead of checks. Deposit of the check orautomatic debit is deferred for an agreed-upon time, which may be tied to thenext payday (even if only a matter of days), or for a scheduled period of timeup to a month.").40. Fox, supra note 12, at 990. Some lenders can shorten loan terms tomaximize costs by taking advantage of state statutes allowing loan terms ofup to one full month. Drysdale & Keest, supra note 16, at 603-04 (explaininghow lenders who would make 20 off a loan fee on a 100 loan payable in onemonth can make twice that if the loan term were for two weeks and theborrower rolled it over and noting that "[t]his may help explain why two weeksis the most common term for payday loans").41. Fox, supra note 12, at 990 ("[Tlhe consumer can either redeem thecheck with cash or a money order, permit the check to be deposited, or renewthe loan by paying another fee"); see also Drysdale & Keest, supra note 16, at601 ("To avoid appearing to roll over the debt, the lender may ask you to takeout a 'new loan,' in which case you pay the 15 fee, but write another check for 115."). The last two options are virtually indistinguishable; the distinctionmade here merely clarifies the later discussion, see infra Part II.B.l.a,regarding the inadequacy of statutes that attempt to prohibit rollovers.42. See Paul Gores, Payday Lenders Tout New Study, MILWAUKEE J. &

20021PAYDAY LOANSthe cost of the loan. If the customer signs a debit authorizationagreement, the payday lender automatically withdraws the43rollover/refinance charge from the customer's bank account.No matter how the lender characterizes or collects the fee, thefee does not count towards the original principal, and theconsumer, therefore, remains indebted until he or she pays theentire original loan in a single payment.44 In other words,lenders do not accept partial payments, which explains whyOrtega still owed 300 even though she paid National MoneyService 1800 in rollover fees.4 5 The rollover practice will beaddressed later in Part II.B.1. Given such payment terms, onemay wonder what type of consumer chooses payday loans.While borrowing against future income represents acommon practice in America, payday lenders serve a uniqueclass of consumers lacking sufficient income to cover financialneeds. 46 Part III discusses these consumers in depth. For now,realize that payday loan customers, like many Americans,possess limited incomes and no savings, but they are a distinctsubset of the populous because they lack access to traditionalforms of credit. 47 Turned down for credit or owning maxed-outcredit cards, they also have no homes and thus cannot get anequity line of credit to cover expenses. 48 Many have damagedcredit histories for any number of reasons, including a previousbankruptcy filing. 49 These consumers can turn to nonbanksthat stand ready to meet their need for short-term credit. Asexplained below, it is clear these consumers approach paydaySENTINEL, May 8, 2001, at D1, available at 2001 WL 9354775.43. Drysdale & Keest, supra note 16, at 601. Recall Leticia Ortega whohad her bank account debited 90 every two weeks for almost a year byNational Money Service in order to roll over the loan. See supra notes 1-10and accompanying text.44. Kathleen E. Keest, Stone Soup: Exploring the Boundaries BetweenSubprime Lending and Predatory Lending, in CONSUMER FINANCIALSERVICES LITIGATION 2001, at 1107, 1115, (PLI Corporate Law & PracticeCourse, Handbook Series B-1241, 2001) ("Since the fees are flat fees, and theloans are nonamortizing, the fees pile on and on, while the principal remainsuntouched."), available at WL 1241 PLI/Corp 1107.45. Geller, supra note 2.46. See, e.g., Shaun Schafer, Lenders Thrive on Debt Cycles, TULSAWORLD, Jan. 28, 2002, at 1 (quoting a payday loan customer who stated thatshe could trace the eight payday loans that she had obtained back to shortlyafter her fifteen-year marriage ended), available at 2002 WL 7106735.47. See infra notes 537-47 a

Payday loans are extremely high-interest, short-term loans offered to cash-strapped consumers. Some of the problems with payday loans can be illustrated succinctly by the experience of one payday loan customer, Leticia Ortega.' Realizing that her next payday was two weeks away, Ortega worried about how

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