Class actions against payday lenders show how Concepcion has been used to gut state consumer protection laws
By Paul Bland, Senior Attorney
Two years ago, the U.S. Supreme Court, by the usual 5-4 vote, decided in AT&T Mobility v. Concepcion that the Federal Arbitration Act requires courts to enforce previously illegal contract terms banning consumers from joining together to sue businesses that cheat them.
So how has this decision actually affected consumers? A series of cases in Florida involving payday lenders shows how devastating it’s been.
In Florida, making a loan with an annual interest rate above 45 percent is considered “loan sharking,” and is a crime. That is, unless the legislature passes a law making an exception, which it did for payday loans in 2001.
Prior to September 2001, loans with interest rates above 45 percent were outright illegal. Yet a number of payday lenders were charging Florida consumers interest rates of 300 percent to even over 1,000 percent. Between 1996 and 2001, hundreds of thousands of borrowers — most of them low-income families — ended up unable to pay off these loans; they got onto a treadmill of debt that often lasted years. In some cases, consumers paid out over $1,000 on loans of $250 and still owed the principal. The lenders knew that most consumers would not be able to pay off the loans quickly, and the lenders’ profits came from consumers who rolled over their loans many times.
In the late 1990s, consumers who had been victimized by these illegal loans brought a number of class actions against the payday lenders. In four of the cases, the lenders settled, for a total of about $20 million; the case Reuter v. Check N Go, for example, settled for $10.275 million. A copy of the settlement agreement is here, and the order of the court finally approving it is here. A reconciliation prepared at the end of the case shows that after fees and expenses were deducted, checks were received and cashed by 21,973 consumers, for an average recovery of $310 per consumer. Document here. Similar settlements were reached involving The Check Cashing Store, Ace Cash Express, Inc. and Buckeye Check Cashing, Inc.
But one case, Betts v. McKenzie Check Advance of Florida, did not settle. It went forward to an evidentiary hearing before the Circuit Court in West Palm Beach. The purpose of the hearing was to determine how enforcement of McKenzie’s arbitration clause — which, like most arbitration clauses, banned consumers from bringing or joining class actions — would impact consumers’ ability to pursue their rights under Florida’s consumer protection laws.
At the hearing, documents revealed that no individual cases had ever been filed. Not a single one. These consumers needed the mechanism of a class action to address their rights; without it, it was starkly clear that no claim would ever be brought. We also put before the court evidence that these Florida consumers generally had no idea that the lenders were operating illegally; without a class action, then, it was very unlikely any of them would ever know they could file a claim.
After two days of testimony by consumers, expert witnesses, a legal aid lawyer who had not been able to find any lawyers willing to take referrals of cases against payday lenders, and payday loan executives, the court found that no competent lawyer would have been able to pursue the consumers’ claims on an individual basis, and that if the class action ban was enforced, it would “defeat the [Florida Consumer Protection statutes’] remedial purposes and undercut their deterrent value.” The court, and later a Florida District Court of Appeal, threw out the class action ban as violating the state’s public policy. This made sense: companies can’t write contract terms that gut state consumer protection laws.
All that changed after the U.S. Supreme Court decided Concepcion. Last month, the Florida Supreme Court held in Betts that the Federal Arbitration Act preempts (overrides) any state law that would strike down a class action ban in an arbitration clause for undermining any state statute. Our clients were ordered into individual arbitration, which (as the evidence showed) offers them no meaningful remedy. The payday lender will be immune from any legal remedy from the tens of thousands of other consumers who were overcharged.
The lesson of the Florida payday cases is clear: when consumers are able to pursue their claims under state consumer protection laws in court, and through class actions, they recover millions of dollars illegally taken from them — and the laws against loan sharking are enforced.
But in a sad turn of events for consumers, Florida’s highest court concluded that, because of Concepcion, it had no choice but to enforce the arbitration clause — even where doing so would gut those laws and permit corporate cheating to continue unchecked.