how the payday predator hides among us

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HOW THE PAYDAY PREDATOR HIDES AMONG USTHE PREDATORY NATURE OF THE PAYDAY LOANINDUSTRY AND ITS USE OF CONSUMER ARBITRATIONTO FURTHER DISCRIMINATORY LENDING PRACTICES

by MICHAEL A SATZ*

INTRODUCTION The pound of flesh which I demand of him / Is dearly bought;'tis mine and I will have it.

--William Shakespeare, The erchantof VeniceThe above quote comes from the character Shylock in Shakespeare s The

erchantof Venice who demands a pound of Antonio s flesh as security for ausurious loan.2 While the quote comes from a well-known classic, there aremodem-day commercial actors who behave in very much the same manner asShakespeare s fictional Shylock-payday lenders. This article addresses America'smodem-day loan shark, the payday lending industry, who extracts a pound of fleshfrom the economic well being of society s most vulnerable populations. A boomingfringe banking industry, payday lending brings predatory lending activities to thedoorsteps of some of our country s poorest citizens. While the detrimental effectsof this lending practice are well known, documented, and condemned, it seems thatvery few with the power to bring about change are willing to take the necessarysteps to trigger that change, and those who try are stymied by systemic problemsthat prevent the effective regulation of payday lenders.The ideas expressed in this Article join a growing chorus of payday loanindustry critiques from inside academia to consumer advocates. Specifically, thisarticle shows the predatory nature of the payday loan industry, the industry'sspecific discriminatory targeting of minorities, and the industry s use of consumerarbitration agreements to further its discriminatory lending practices.Part I of this article clearly and formulaically articulates the predatory lendingpractices of payday lenders. Part II demonstrates that the payday lending industrydeliberately targets minorities, causing them to bear the brunt of that industry's

*Associate Professor of Law, University of Idaho College of Law, J.D., 2000, University of MichiganLaw School; B.A./B.S., 1990, Southern Methodist University. I would like to express my gratitude tomy research assistant, Joslynn Miller, for her excellent work on this article.

1. WILLIAM SHAKESPEARE, THE MERCHANT OF VENICE act 4, sc. 1 I1.99-100 (M.M. Mahood ed.,New Cambridge Shakespeare updated ed. 2003).2 d


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TEMPLE POLITICAL CIVIL RIGHTS LAW REVIEWpredatory actions disproportionately. Part III reviews the use of arbitrationagreements in general consumer transactions and in the payday lending context,concluding that such agreements should be restricted given the predatory nature ofpayday lending transactions. Part IV argues that the corrective actions taken on anational level to protect military members from payday loan transactions should beapplied universally. The fact that such protections have not been applieduniversally demonstrates the discriminatory nature of American politics.Ultimately, this Article concludes that the failure to act uniformly to protect all ofAmerica s citizens is due, in part, to the fact that scholars and activists have failedto unite efforts to correct large-scale wrongs by focusing too much on identitypolitics rather than uniting when there is a convergence of interests.

I. PAYDAY LENDING AS A PREDATORY LENDING PRACTICE THAT TARGETSDISADVANTAGED PEOPLES

A PredatoryLendingPredatory lending is notoriously difficult to define.' In fact, even the FederalDeposit Insurance Corporation (FDIC) has noted that [t]here is no simple checklist

for determining whether a particular loan or loan program is predatory. ' 4 red torylending may be characterized by an unfair exchange or disproportionate loanpricing presenting a risk to the borrower.5The lack of a clear definition of predatory lending makes regulating actorswho engage in predatory practices quite difficult. 6 Without a definition, opponents

of any meaningful reform in this area claim that remedies are simply not needed.7But the definitional issues are not fatal, as payday lending scholars are able to know predatory lending when they see it. 'Because there is inherent confusion regarding the concept of predatorylending, lists of traits or analytical guidelines to characterize predatory lending areuseful. Although this Article focuses on payday lending, most of the scholarship

3 See Kurt Eggert, Held Up in Due Course:PredatoryLending Securitization and the Holder nDue Course Doctrine 35 CREIGHTON L. REv. 503, 511 n.8 (2002) ( The term 'predatory lending' .. isfar-reaching and covers a potentially broad range of behavior. As such, it does not lend itself to aconcise or comprehensive definition. (quoting then-Federal Reserve Board Governor Edward M.Gramlich, Remarks at the FederalReserve Bank of Philadelphia ommunity and Consumer AffairsDepartment Conference on Predatory Lending (Dec. 6, 2000), http://www.federalreserve.gov/boarddocs/speeches/2000/20001206.htm (last visited Nov. 14, 2010))).

4. Fed. Deposit Ins. Corp., FDIC s Supervisory Policy on Predatory Lending 1 (Jan. 22, 2007),available at http://www .fdic.gov/news/news/financial/2007/filO7006.pdf.

5 See id ( Signs of predatory lending include the lack of a fair exchange of value or loan pricingthat reaches beyond the risk that a borrower represents or other customary standards. ).

6 See Kathleen C. Engel Patricia A. McCoy, A Tale of Three Markets: The Law andEconomicsof PredatoryLending 80 TEX. L. REV. 1255, 1259 (2002) ( In 2000, Senator Phil Gramm, then thechairman of the Senate Banking Committee, famously asserted that predatory lending could not beaddressed until it could be defined. ).

7. Id t 1260.8. d

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HOW THE PAYDAY PREDATOR HIDESaddressing predatory lending revolves around home- mortgage lending practices.Given the higher per-transaction value associated with purchasing a homecompared to obtaining a payday loan, this home-mortgage focus makes sense. Assuch, many of the predatory activities generally described by scholars do not, ontheir face, appear applicable to the payday lending transaction. The seeminglyunrelated factors attributed to home-mortgage predatory lending practices are,however, actually largely analogous to the tactics that payday lenders utilize. 9Thus, in this Part, the Article identifies these analytical predatory lendingguidelines, and then applies the guidelines to specific practices of the paydaylending industry.Before establishing what types of behaviors constitute predatory lending, it isimportant to distinguish between subprime lenders and predatory lenders.1Subprime lenders market financial products to borrowers who are consideredhigher credit risks than prime borrowers. The risks associated with subprimeborrowers can be the result of the borrower s poor credit ratings, low income, highdebt-to-income ratio, prior bankruptcy, or anything that tends to indicate that theborrower will not perform as well as a prime borrower.' 2 While it is true that thereare higher incidents of predatory lending in subprime markets, it does notnecessarily follow that all subprime lenders are predatory actors.' 3 In fact, manysubprime lenders are legitimate lending institutions that provide valuable services,like supplying needed credit to a large segment of the population.14 Conversely,though a prime lender may advance credit to more creditworthy customers at aprime rate, it does not necessarily mean that the prime lender cannot or does notengage in predatory lending practices. Accordingly, predatory lending is notlimited to one class of borrowers.Predatory lenders typically target customers that have insufficient experience,knowledge, and skills to understand the ramifications of the lending transaction thatthey are consummating. 6 These customers often lack the ability to substantively

9 See Nathalie Martin, 1,000 Interest-Good While Supplies Last: A Study of Payday LoanPractices andSolutions 52 ARiz L. REV. 563, 591-92 (2010) (discussing measures taken by paydaylenders to get around legislation, such as how payday lenders in Ohio have found a suitable alternativeby switching their license to operate under the Mortgage Lending Act).

10. See FED DEPOSIT INS. CORP., supra note 4, at (broadly describing the differences between themarket niche that subprime lenders occupy and the act of predatory lending).

11 d12. See id Subprime lending includes loans to persons who present heightened credit risk because

they have experienced problems repaying credit in the past, or because they have only a limited credithistory. ).

13 See Engel & McCoy, supra note 6, at 1261 ( In the overwhelming percentage of cases,predatory loans are a subset of subprime loans, which are loans with higher interest rates that aredesigned for borrowers with impaired credit or who do not otherwise qualify for loans in theconventional prime market. Nevertheless, legitimate subprime loans and predatory loans are analyticallydistinct. (footnote omitted)).

14 See FED DEPOSIT INS CORP., supra note 4, at (noting that subprime lenders are legitimate when they have been responsibly underwritten, priced and administered. ).15. Id.16. See Kathleen C. Engel, Do Cities Have Standing? Redressing the Externalitiesof Predatory

Lending 38 CONN L. REV. 355, 356 (2006) ( Predatory lenders market their products to people wh ohave little or no experience with mortgage loans and who do not have sufficient skills to untangle the

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TEMPLE POLITICAL & CIVIL RIGHTS LAW REVIEWassess their options. 7 Predatory lending often includes targeted and deceptiveadvertising that focuses on a particularly vulnerable group or groups. 8 Ultimately,predatory lenders engage in deception or fraud, manipulating the borrowerthrough aggressive sales tactics, or taking unfair advantage of a borrower s lack ofunderstanding about loan terms. These practices are often combined with loanterms that, alone or in combination, are abusive or make the borrower morevulnerable to abusive practices. ' 9In a significant article that undertook to define predatory lending and thenapply the definition to the home-mortgage market,2 Professors Kathleen Engel andPatricia McCoy catalogued activities, which indicate when a particular lendingtransaction is predatory:

[F]ive basic problems emerge. We can thus define predatory lendingas a syndrome of abusive loan terms or practices that involve one ormore of the following five problems: (1) loans structured to result inseriously disproportionate net harm to borrowers, (2) harmful rentseeking,2' (3) loans involving fraud or deceptive practices, (4) otherforms of lack of transparency in loans that are not actionable asfraud, and (5) loans that require borrowers to waive meaningful legalredress. 22

According to professors Engel and McCoy, predatory loans will generallyexhibit at least two of these problems.23 Additionally, Professor Kurt Eggertanalyzed predatory lending in Held p in Due Course: Predatory Lending,Securitization,and the Holder in Due CourseDoctrine.4 Eggert points out that onemaze ofcontract terms and engage in meaningful assessments of their options. ) (footnotes omitted).

17. See id. at 357 ( The lenders exploit their lack of sophistication and lure [inexperiencedcustomers] into loans they cannot afford through promises of future refinancing, misrepresentation ofloan terms, and various bait and switch tactics. ).

18. See Melissa LaVenia, Development, Predatory Lending s Role in the Subprime MortgageCrisis, 27 REV. BANKING & FIN. L. 101 103 (2008) ( Demographically, minorities are much morelikely to receive subprime mortgages than their white counterparts. Though minority homeownershiprates have historically been 25 percent below that of white homeowners, the Federal Reserve believesonly a fraction of this difference can be explained by differences in income. Predatory practices mayaccount for part of this discrepancy, as predatory lenders take advantage of unsophisticated borrowerswho have not had much (if any) prior experience with homeownership or owning large assets. )(footnotes omitted).

19. Eggert, supra note 3, at 511 (quoting JOINT U.S. DEP'T OF HOUSING AND URBAN DEV.-U.S.DEP T OF THE TREASURY TASK FORCE ON PRED TORY LENDING CURBING PREDATORY HOMEMORTGAGE LENDING 1 (June 2000), availableat http://www.huduser.org/Publications/pdf/treasrpt.pdf.

20. Engel & McCoy, supra note 6, at 1271.21. Professors Engel and McCoy define rent-seeking as follows: [W]hen subprime lenders usetheir market power to charge rates and fees that exceed the rates and fees they would obtain in acompetitive market, they extract harmful rents from borrowers. Such rent-seeking is another commonfeature of predatory lending. Id. at 1265. Additionally, excessive rent-seeking includes padding the

transaction with excessive, hidden, or deceptive fees. Id at 1266.22. Id. at 1260.23. See id. at 1261 ( Most, if not all, predatory loans combine two or more of these problems.

Similarly, some abusive terms or practices fall into more than one category. ).24. Id. at 503.

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root cause making it difficult to define predatory lending is that many predatorylending practices are on their face indistinguishable from legitimate lendingactivities. 5 He posits that predatory lending essentially consists of two types ofactivities. The first type involves actions that are either clearly illegal orunconscionable by their very nature. 26 This class of predatory lending activitiesencompasses misrepresentation and the forging of signatures.27 The second class ofactivities typifies the difficulty of policing predatory practices: activities that areessentially legal, but when misused by unscrupulous lenders, take undue advantageof borrowers.28 From this second type of activity, Eggert distilled a list of toolsemployed by predatory lenders in the home mortgage market. 29 Of those tools, thefollowing are relevant to the critique of the payday lending industry: (1) fees andinterest rates far greater than necessary to provide a reasonable retum; 30 (2) flipping --the early or frequent refinancing of a loan (analogous to the paydayloan industry practice of rollover discussed in Part I.A, infra ;2 (3) high pressureand misleading sales and marketing techniques; 3 2 and (4) excessive prepaymentpenalties (referred to as the anti-payment penalty in the payday loan industrydiscussed in Part I.A, infra .33Rather than functioning like a proposed statutory framework, the listsproposed by Eggert, Engel, and McCoy are better utilized as a framework withinwhich predatory lending practices and the payday lending industry can beanalyzed.14 When conducting an analysis, though, it is most important to recognizethat predatory lending harms both individuals and communities. 35

B The PredatoryNatureof PaydayLendingAt first, a typical payday lending transaction appears relatively straightforwardand simple. Upon further examination of the transaction itself, or perhaps more

25. Eggert, supra note 3, at 513.26. d27. Id.28. See id. at 513-14 ( Practices such as balloon payments, adjustable rate mortgages, rapidrefinancing of existing loans, and even high interest rates and fees could be used in non-predatory loans.For example, a borrower might choose to pay a higher interest rate in order to pay lower fees, or choose

an adjustable rate loan to pay an initially lower interest rate. As long as these terms that benefit lendersto the detriment ofborrowers are understood by borrowers and negotiated by them, borrowers can eitherreceive something in return for the loans or decide to forgo the loan. These t rms become the tools ofpredatory lenders when, as is common in the subprime market, they are neither negotiated over norunderstood by the borrowers, and when borrowers receive little in returnfor agreeing to them. )(emphasis added).

29. Id t 514-19.30. Id. at 514.31. Eggert, supranote 3, at 515.32. Id. at 516.33. Id. at518.34. See ngel McCoy, supra note 6, at 1261 ( Rather than serving as a proposed statutorydefinition, [Engel's McCoy's] definition of predatory loans is intended as a diagnostic tool foridentifying problematic loan practices that require redress. ); Eggert, supranote 3, at 513-14 (describing

the tools of the predatory lender).35. FED. DEPOSIT INS. CORP. upra note 4, at 3.

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correctly, the series of transactions that the initial advance leads to, the transactionis significantly more complicated and expensive than it initially appears. In fact, thecommon marketing and collection practices utilized by payday lenders indicate thatpayday lending is predatory in nature. Part 1 of this section describes the paydaylending transaction and the potential revolving debt cycle for borrowers. Part 2 ofthis section analyzes the practices of the payday lending industry, employing theanalytical guidelines established in Part II.A, supra.

1. The Payday Loan Transaction and Practices of the Payday LendingIndustryCompared to a traditional consumer loan, the payday lending transaction isvery simple to consummate. A typical consumer lending transaction includes acredit check, an analysis of the potential borrower s debt-to-income ratio (either

through the credit-scoring process or by the lending institution), verification of thepotential borrower s identity through a governmental ID card and social securitynumber, and verification of the borrower s address.36 Much of this process istransparent to the borrower at the ground-level transaction because it is oftencompleted at the credit-check stage.A payday loan, on the other hand, requires much less. There is no credit checkor analysis of the borrower s debt-to-income ratio. The process raises little concernfor the borrower s ability to repay.37 Instead, payday lenders typically require adriver s license, paystub or other proof of income, bank statement, telephone bill,and checkbook. 38Payday loans generally involve small dollar amounts, usually between $50 and 1000. 39 The borrower either writes a post-dated check or authorizes an electronic

36. See generally HUD Real Estate Settlement Procedures Act, 24 C.F.R. 3500.2(b) (2009)( Application [for a loan] means the submission of a borrower s financial information in anticipation ofa credit decision relating to a federally related mortgage loan, which shall include the borrower's name,the borrower's monthly income, the borrower's social security number to obtain a credit report, theproperty address, an estimate of the value of the property, the mortgage loan amount sought, and anyother information deemed necessary by the loan originator. ).

37. Mary Spector, Taming the Beast: Payday Loans, Regulatory Efforts, and UnintendedConsequences, 57 DEPAUL L. REv. 961, 966 (2008); see also URIAH KING ET AL., CTR. FORRESPONSIBLE LENDING, RACE MATTERS: THE CONCENTRATION OF PAYDAY LENDERS IN AFRICAN-AMERICAN NEIGHBORHOODS IN NORTH CAROLINA 3 n.6 (2005), available athttp://www.responsiblelending.org/ rthcarolina/ncpayday/researchanalysis/racematters/rr006-Race MattersPayday inNC-0305.pdf (referring to payday lending as asset-based lending, or lending without regard to the ability to repay ).

38. Creola Johnson, Payday Loans:Shrewd Business or PredatoryLending?, 87 MINN. L. REV. 1, 9(2002).; see Spector, supra note 37, at 966 ( [O]nly a current pay stub or other proof of regular incomeis needed [to obtain a payday loan]. ).

39. See Dawn Goulet, Comment, ProtectingOurProtectors:The Defense Department s ew Rulesto Prevent Predatory Lending to Military Personnel, 20 LOY. CONSUMER L. REv. 81, 83 (2007)(describing payday loans as transactions in which the borrower obtains a minimal cash advance,typically between $100 and $500, on his salary for two weeks. ); Spector, supra note 37, at 961 ( Alsoknown as payday advance, a deferred presentment transaction, or a deferred deposit advance, the paydayloan is a small-dollar, short-term, unsecured loan that borrowers promise to repay within a matter ofweeks, often out of their next paycheck. ).

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debit from her checking account for the amount of the loan plus a fee associatedwith the loan) 0 The borrower generally promises to repay the loan by her nextpayday, usually within two weeks, or authorizes the payday lender to cash thecheck or debit her account. 4' The fees for obtaining a payday loan vary dependingupon the size of the loan, but generally range from $15 to over $50 dollars. 42 Whilethis additional cost is often described as a mere fee, from a credit perspective it isessentially a finance charge-what it will cost the customer to receive the cashdv nce 4 Characterized as a finance charge, and thus expressed as an annualpercentage rate (APR), the unduly high cost of credit to the payday loan customeris readily apparent: a $200 loan with a fourteen-day term, at a $15 fee per $100borrowed, will cost the customer $230.44 This translates to a 390% APR for a $200loan 45 Depending on the jurisdiction and transaction, the APR for a payday loancan reach even higher, ranging from 400% to an astounding 910%.46The upfront transaction costs required to enter into a payday loan transaction,as astonishing as they may be, are just the beginning of the credit costs to mostpayday loan borrowers. These costs are compounded by pernicious acts employedby the payday lending industry, like refusing to allow borrowers to make partialpayments on the principal borrowed. 47 Although the typical payday loantransaction begins with a cash advance ostensibly limited in time by only one payperiod, many, if not most, payday loan customers do not actually have the money torepay the principal balance at the end of that period a.4 The borrowers often find thatthey need the money that would otherwise repay the loan to pay for basicnecessities. One study found that it is actually statistically impossible for the typicalborrower to pay back a payday loan within two weeks. 49 The typical payday loan

40. Johnson, supra note 38, at 9-10.41. See Goulet, supra note 39, at 81 (referencing the payday loan taken out by Navy Air Traffic

Controller Matthew Hubbell, which mandated payment-in-full two weeks after borrowing); Johnson,supranote 38, at 10 (noting that the usual term of the loan is up to two weeks.).

42. See KING ET AL., supra note 37, at 3 ( On a $300 payday loan, a borrower typically incurs $45in fees and receives $255 in cash. ); see also Goulet, supranote 39, at 83 (noting that the fees customerspay are typically between $15 and $35).

43. See Truth in Lending (Regulation Z), 12 C.F.R. 226.4(a) (2010) ( The finance charge is thecost of consumer credit as a dollar amount. It includes any charge payable directly or indirectly by theconsumer and imposed directly or indirectly by the creditor as an incident to or a condition of theextension of credit. It does not include any charge of a type payable in a comparable cash transaction. )44. Spector, supra note 37, at 961-62.

45. Id t 962.46. Id ; see also Goulet, supra note 39, at 83 (calculating payday loan fees at an annual interest rateof 300-400%); Megan S. Knize, Payday Lending in Louisiana Mississippi and Arkansas: Toward ffectiveProtections or Borrowers 69 LA. L. REV. 317, 319-20 (2009) ( For the $325 loan, the lendercharges $55, which works out to an Annualized Percentage Rate ('APR') of 531%. ).

47. See Johnson, supra note 38, at 59.48. See id. (noting that the average payday loan customer does not have sufficient disposableincome to service debt).49. See Knize, supranote 46, at 324 ( [A] borrower making $25,000 a year would, without makingpayments on a loan, fall short $14 each week on recurring payments for food, housing, healthcare,

transportation, and utilities. She would be unable to pay her loans without taking a second job or asecond loan. ); Johnson, supra note 38, at 59 ( Assuming a payday loan customer earns $1138 everytwo weeks and owns an outstanding $168 loan, [after paying for necessary expenses] she will have a

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TEMPLE POLITICAL CIVIL RIGHTS LAW REVIEWborrower takes out the loan due to exigent financial circumstances and becausethere is no other source of credit available to him or her.5 0 For an individual facedwith such an economic emergency, another study noted that it typically takes ninetydays for the consumer to regain financial stability after receiving the loan-not thetwo-week time period of the typical payday loan.

When coupled with the payday lender s refusal to accept any partial principalpayments, the borrower s inability to pay leads to the phenomenon of rollover.Rollover occurs when the customer, unable to repay the full principal and unwillingto fall into default if the payday lender attempts to cash her check, rolls the paydayloan over for another pay cycle, again typically two weeks. 2 Because mostborrowers cannot pay the principal even after one rollover, this leads to a debt cyclewhere the customer continues to accumulate rollover fees without reducing theprincipal debt owed, and without obtaining any additional funds.5 3 Studies showthat the majority of payday loan borrowers end up in this debt cycle and enter intofive to thirteen lending transactions per year, with most customers closer tothirteen. 14

2. Payday Lending as Predatory LendingThe bloated cost of credit to consumers created by payday lending, and thedestructive debt cycle that ensues, represent only a portion of the predatory nature

of the payday lending industry. Payday lenders utilize numerous additionalpractices that are classified as predatory. This section systematically applies thefactors identified above by Professors Engel and McCoy, to the common practicesemployed by the payday lending industry to demonstrate that individual paydayloan transactions, as well as the industry as a whole, are predatory in nature.Recall that Engel and McCoy identified five basic problems associated withpredatory lending in the mortgage market. 5 Similarly, Eggert developed acomprehensive list of tools used by predatory mortgage lenders. While many ofthese tools are only applicable to the mortgage b usiness, a number of the factors arerelevant in analyzing the predatory nature of the payday lending industry.5 6

It should be noted that some of the categories from both lists are duplicativeand will be addressed together in the analysis that follows. For example, the first

deficit of $34 if she pays back the loan in full on time. ).50 See Spector, supra note 37, at 966-67 (commenting that the typical payday borrower does nothave access to traditional credit outlets and often seeks a short-term loan because of a financialemergency, such as car repairs or medical expenses).51. Id at 967.52. Johnson, supranote 38, at 56.53. See id at 56-57 ([R]ollovers should be defined more broadly to encompass not only thestraightforward practice of paying a renewal fee but also the practice of refinancing a loan by taking out

a 'new loan' from the same payday lender to pay off the 'old loan' with the proceeds from the new. ).54. See e.g. Johnson, supra note 38, at 57 ( In a 1999 study, the Illinois Department of Financial

Institutions found that the one-time payday loan customer represented the exception and foundcustomers held an average of thirteen contracts. ).55. Engel McCoy, supranote 6, at 1260. For a list of the five basic problems see supra note 22

and accompanying text.56. Eggert, supranote 3, at 514-19; see supranotes 20-33 and accompanying text.

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factor in both lists-disproportionately high interest rates-is sufficiently similar,such that an analysis of the activities represented by both of those factors iscombined. 7 Likewise, Engel s and McCoy s third and fourth factors are similar toEggert s third factor, and are combined in one category below.

58Additionally,some of the common practices linked to one payday lending predatory act crossover into multiple other predatory lending categories analyzed.

a. Disproportionate Net Harm to Borrowers and Fees Greater thanNecessary to Provide a Reasonable ReturnPayday loan fees, in effect, inflate the APR advertised to borrowers; thesehidden costs thus illustrate the predatory nature of the payday loan industry. Payday

loans commonly start at an APR of around 300 to 400%, 59 and depending on theparticular lender, can be even higher.60 Even in jurisdictions that attempt to controlpayday lending by strict statutory regulation, the starting APR for payday loansremains near 390%.61 This excessively high rate of interest far surpasses a ratenecessary to provide a reasonable return and greatly harms the borrower whocannot afford to pay such a high interest rate.While proponents of the industry s practice of charging such high APRs arguethat the rates reflect the heightened risk of loss to the payday lender due to the typeof customer to which they lend, 62 the high profits realized by the payday lendingindustry undercut this argument. The payday lending industry generates ninetypercent of its revenue from the interest and fees it charges its customers. 63 In 2007,this revenue aggregated into a staggering $8.6 billion in fees, relative to almost $50billion of loans.64

The disproportionate harm to the borrower is compounded exponentially bythe industry practice of refusing to accept partial payment towards reducing theprincipal debt, thus leading to the rollover of the loan. 65 For example, in on e

57. Compare Engel & McCoy, supra note 6, at 1260 ( loans structured to result in seriouslydisproportionate net harm to borrowers ), with Eggert, supra note 3, at 514 ( fees and interest rates fargreater than necessary to provide a reasonable, market-driven rate of return ).58. Compare Engel & McCoy, supra note 6, at 1260 ( (3) loans involving fraud or deceptivepractices, (4) other forms of lack of transparency in loans that are not actionable as fraud ), with Eggert,supra note 3, at 516 ( High Pressure and Misleading Sales and Marketing Techniques ).

59. Goulet, supranote 39, at 83.60. See Spector, supra note 37, at 962 ( [Olne study found APRs on similar transactions to be ashigh as 9 10%. ).61 See MONSIGNOR JOHN EGAN CAMPAIGN FOR PAYDAY LOAN REFORM, HUNTING DOWN THE

PAYDAY LOAN CUSTOMER: THE DEBT COLLECTION PRACTICES OF wo PAYDAY LOAN COMPANIES 4(Oct. 2006), http://www.woo dstockinst.org/publications/download/hunting-down-the-payday-loan-custome r:--the-debt-collection-practices-of-two-payday-loan-companies (showing that since passage ofthe Payday Loan Reform Act in Illinois the typical payday loan carries an APR of 387.42%).

62. See TOM LEHMAN, IND. WESLEYAN UNIV., PAYDAY LENDING AND PUBLIC POLICY: WHATELECTED OFFICI LS SHOULD KNOw 9-10 (Aug. 2006), http://www.fisca.org/Content/NavigationMenu/Resources/Forthelndustry/ResearchPublications/WhatElectedOfficialsShouldKnow.pdf (noting that thehigh APRs are justified by the high-risk clientele payday lenders serve).

63. Knize, supranote 46, at 322.64 Id at 322-23.65. See Johnson, supra note 38, at 59 (discussing the effects of prohibition on partial payments and

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typical rollover case, a payday loan customer borrowed $300 from a payday lender,but ended up paying $1800 in fees once she was sucked into the payday loan-debttreadmill.6 6 To increase the already predatory nature of the transaction, the paydaylender also required the borrower to enter into a bank debit agreement that enabledthe lender to debit the rollover fee from her bank account every two weeks. 67Worse than authorizing automatic bank debits is wage assignment, anincreasingly popular method of payment used by payday lenders in which aborrower authorizes her employer to pay a lender directly from her wages. 68 Wageassignments harm borrowers because the interest given to the payday lender fromthe borrower's wages puts the payday lender ahead of even the borrower's securedcreditors. 69 For example, if a borrower has a mortgage or auto-loan payment tomake, the payday lender gets paid first, directly out of the borrower's wages beforethe borrower has the chance, or the choice, to pay other creditors that have asecurity interest in the borrower's property.7 This leads to a higher likelihood thatborrowers will default on either their mortgage or auto loan.7Lastly, a payday lender has debt-collection options that a borrower would no tnormally be subjected to in a typical loan transaction. Under bad check statutes inmany states, a payday lender can sue for treble damages rather than just the cost ofthe loan and other associated collection costs. 7 2 Not only is this harm to adelinquent borrower disproportionate to the cost incurred by the payday lender, incases where the lender collects, it leads to a windfall.

b. Harmful Rent-SeekingHarmful rent-seeking, another feature of predatory lending, occurs when

subprime lenders use their market power to charge rates and fees that exceed therates and fees they would obtain in a competitive market and they extract harmfulrents from borrowers. 73 The term also includes padding a transaction with

payment rollover fees).66. See id t 2-3 ( [F]or almost a year, National Money Service debited Ortega's bank accountevery two weeks in the amount of $90 as interest to 'roll over' the loan ecause none of the $90interest payments counted as principal, Ortega still owed National Money Service $300 even though she

had paid $1800 in interest charges. (footnotes omitted) (citing Adam Geller, PaydayMay Day: Short-Term Lenders Under Fire Hous. CHRON., Jan. 26, 2001, at B I)).

67. Id.68. See MONSIGNOR JOHN EGAN CAMPAIGN FOR PAYDAY LOAN REFORM, supra note 61, at 9(discussing some of the consequences ofwage assignments).69. Id.70 Id.71. Id72. See e.g. 720 ILL. COMP. STAT ANN. 5/17-1a (West 2003) (providing a civil remedy of trebledamages for a payee under the criminal bad check statute); ARIZ. REV. STAT ANN 6-1260(J) (2007)(West) ( If a check is returned to the licensee from a payer financial institution due to insufficient funds,a closed account or a stop payment order, the licensee may use all available civil remedies to collect onthe check including the imposition of the dishonored check fee .... );ee also Johnson, supra note 38,at 83 ( Many states allow the collection of treble damages for payment of debts arising out of bad-checklaw violations, but only a few states have passed legislation to prevent payday lenders from taking

advantage of such statutes. (footnotes omitted)).73. Engel & McCoy, supra note 6, at 1265 (footnote omitted).

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excessive, hidden, or deceptive fees 74 which results in fees substantially in excessof what a borrower would pay in a more traditional lending transaction.75 Paydaylenders address complaints about rent-seeking tactics with two different arguments.First, they argue that the traditional payday loan customers often do not have accessto traditional forms of financing. 76 Second, they argue that the fact that the largenumber of payday lending storefronts across the country demonstrates that paydaylending is actually a highly competitive market. 77However, both points can be dismissed. The payday lending industry targetscommunities in which individuals have little to no choice as to where to obtain aloan. These individuals are, in effect, a captive audience. Furthermore, thesearguments attribute the success of the payday loan industry to ordinary marketforces, but fail to explain how the excessive, hidden, or deceptive rollover fees,when coupled with sky-high rates of interest, can be justified solely by ordinarymarket forces.78

c. Fraud, Deception, Lack of Transparency, and Misleading Sales andMarketing TechniquesThroughout the life of the payday loan transaction, payday-lending industry

practices include many tactics and strategies that fall into categories of fraud,deception, lack of transparency, and misleading sales and marketing techniques.The nature of these practices varies from outright illegal, to more deviousmarketing techniques, and remarkably aggressive and harmful collection methods.

One tactic commonly used among the payday lenders-- affinity marketing -is deceptive, at the very least. 79 Affinity marketing schemes are designed to misleadcustomers into thinking that the products offered are sanctioned by an entity of thegovernment.8 0 For example, payday lenders regularly target military personnel fortheir fringe banking products.8 The payday lenders located around military bases

74. See id at 1266 ( Rents can also inhere in added fees and closing costs, including fees for itemssuch as credit reports and document preparation that exceed market rates. Other forms of padding areeven more blatant. Lenders may bill borrowers for duplicative charges, fees for services never rendered,or surcharges on government recording fees. ) (footnote omitted).

75. See Aaron Huckstep, PaydayLending: Do Outrageous Prices Necessarily Mean OutrageousProfits? 12 FORDHAM J. CORP FIN. L. 203, 208 2007) (stating that payday lenders have feestranslating into APRs at rates far higher than traditional lending mechanisms... ).76. See Lehman, supranote 62, at 6-7 (noting that seventy-three percent of payday loan customershave been turned down for credit or not awarded the amount of credit they applied for within theprevious five years).

77. See id at 9 ( Given the strong and increasing demand for small loans for reasons documentedabove, combined with the tremendous growth in the number of payday loan outlets, there wouldcertainly appear to be no market failure in this industry (i.e., competition appears to be thriving). ).

78. See Engel McCoy, supra note 6, at 1266 (stating that harmful rent-seeking includes excessiveand hidden fees).

79. See Goulet, supranote 39, at 85 (discussing the deceptive nature of affinity marketing tactics).80. Id81. Fringe banking refers to the small-sum, short-term, segment of the subprime credit market

which includes products such as payday loans, refund anticipation loans, pawns and title pawns forcash advances, and rent-to-own products for retail sale. Lynn Drysdale Kathleen E. Keest, The TwoTiered Consumer FinancialServices Marketplace: The Fringe Banking System and its Challenge to

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TEMPLE POLITICAL & CIVIL RIGHTS LAW REVIEWengage in affinity marketing strategies to lure military customers into payday loantransactions.12 These techniques include placing advertisements in privatepublications, such as rmy Times which many service members perceive to beofficial military publications.8 3 The advertisements contain official looking sealsdesigned to emulate military seals and are often distributed by retired servicemembers hired by payday lenders to sell loan services to military members. 4 Theseaffinity marketing techniques lead military service members to believe mistakenlythat the loans and products offered by the payday lenders are endorsed or vetted bythe military.8 5Another less-than-admirable strategy employed by payday lenders is to inducethe borrower to enter into alternative lending transactions that are designed to skirt,or even break, the laws attempting to regulate the payday lending industry. 6 Thesealternative lending practices include the sale-leaseback transaction, the cash-catalogsale, and cash-back advertising.17 The sale-leaseback transaction is written up asthough the lender buys an appliance from the customer. The lender then leases theappliance back to the customer for a rental fee until the customer repurchases theappliance. 8 However, the lender never actually takes possession of the appliance,but instead takes a post-dated check from the customer.8 9 As part of the sale-leaseback transaction, if the customer defaults, the lender does not accept theappliance to satisfy the debt. Rather, the lender requires the customer to pay a leaserenewal fee that serves the same deceptive function as the rollover fee.90

In several jurisdictions, payday lenders still retain cash-catalog sale and cash-back advertising companies to deceive and defraud consumers. 9' In the cash-catalog sale transaction, the customer writes a check for the payday loan and aportion of the amount paid is allocated to the purchase of catalog certificates inplace of a loan-servicing fee. 92 In the cash-back advertising transaction, the

Current Thinking About the Role of Usury Laws in Today s Society, 51 S.C. L. REV. 589, 595 (2000);see also U.S. DEPT. OF DEF. REPORT ON PREDATORY LENDING PRACTICES DIRECTED AT MEMBERS OFTHE ARMED FORCES AND THEIR DEPENDENTS 4 Aug. 9, 2006), available athttp://www.defense.gov/pubs/pdfs/Report-toCongress-final.pdf (finding that [p]redatory lendingpractices are prevalent and target military personnel ).

82. See Goulet, supra note 39, at 85 ( Payday lenders target military personnel by setting up shoparound bases, and by employ ing 'affinity marketing' tactics to mislead service members into believingtheir loans are sanctioned by the United States government. ).

83.84. Id. at 85-86.85. See id (reporting that retired military personnel are sometimes recruited to pitch loans and other

services to service members).86. See Johnson, supra note 38, at 19 ( [The] Consumers Union found that fourteen out of thetwenty-one companies surveyed offered sale-leaseback services and ten out of those fourteen

specifically claimed the service was 'not a loan. ') (quoting Carlos Guerra, Not Loans are ReallyBilking PoorTexans SAN ANTONIO EXPREss-NEWS, Mar. 1,2001, at B 1).

87. Id. at 19-20.88. Id. at 18.89. Id. at 18-19.90. Id at 19.91. Id at 19-20.92. See Johnson, supra note 38, at 20 ( When the loan becomes due, the catalog company cashesthe check and gives the borrower the certificates. In theory, the borrower may then use the certificates to

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borrower often incurs further injury when her bank opts to close the borrower'saccount when the borrower defaults on her payday loan. 3 When the customerattempts to open an account at another bank, he could be further disadvantagedbecause many banks refuse to open accounts for people whose previous banks haveclosed their accounts. 4 Once undertaking a payday loan transaction, the paydayloan experience may turn a 'banked' customer into one of the 'unbanked. ' 5 Thisresult is particularly problematic given the average payday loan borrower'sprecarious financial position.

d. Loan Flipping (Rollover)Rollover occurs when a borrower engages in multiple loans over the life of asingle payday lending transaction. 0 6 As discussed in Part II.B, supra rollovers

originate because the payday lending industry refuses to allow customers to paydown their debt by making partial payments on the principal.

17Rollover in thepayday lending context is analogous to mortgage loan flipping. In a predatorymortgage-lending situation, loan flipping occurs when a mortgage is refinanced

multiple times, adding additional fees and charges for which the mortgagor is thenresponsible. 18 Likewise, rollovers generate excessive fees and increased profits forpayday lenders.

In order to avoid violating industry guidelines or statutory limits on thenumber of rollovers a customer can incur in a single loan transaction, paydaylenders simply refinance the loan with a new loan, thus flipping the loan. 9 Anaccurate definition of rollover should broadly cover this type of refinancingtransaction in addition to the well-accepted definition that involves paying renewalfees. 110

http://azstarnet.com/business/local/article-e5866ec7-3790-5b96-a234-lfd446cf4b6c.html (reporting ona lawsuit filed by the Arizona Attorney General's Office against payday lender Quik Cash for suingconsumers in Pima County, Arizona, far from where most of its customers live).

103. Drysdale & Keest, supranote 81, at 6 6 n.95.104. Id.105. d106. ee Spector, supranote 37 at 967 (discussing the process of borrower[s] engaging in multiple

loans or rollovers to extend the life of the loan ).107. ee Johnson, supra note 38, at ( lTlhe consumer remains indebted until he or she pays

the entire original loan in a single payment. ).108. ee Eggert, supra note 3, at 515 ( Flipping is the early or frequent refinancing of a loan,

normally with each new set of loan fees financed by the loan, so that the loan amount continually rises,even while the homeowner makes her payments ome lenders accomplish flipping by requiringtheir borrowers whose loans become delinquent to refinance the loans in order to bring them current....11 ,

109. ee Goulet, supra note 39, at 87 (discussing the payday loan industry's own national tradeassociation, the Community Financial Services Association (CFSA) and its attempts to address concernsabout payday lending and the military by issuing its Military Best Practices guidelines). Althoughthese guidelines claim to 'limit rollovers to four (4) or the State limit, whichever is less,' loan flippinghas continued through back-to-back transactions, in which the lender allows the customer to close outth old loan and then immediately re-open a new loan to bypass the rollover limitation. d110. Johnson, supranote 38, at 56-57.

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HOW THE PAYDAY PREDATOR HIDESe. Excessive Prepayment Penalty as the Anti-Payment PenaltyAnother common practice denies the payday loan borrower the option to makepartial payments on the principal, leading to a loan rollover: I call this the anti-

payment penalty. In a predatory home-lending transaction, a mortgage will likelyhave an excessive prepayment penalty associated with it. ' This serves thefollowing two functions: first, if the lender anticipates that the loan will have ashorter duration, as many subprime loans do, then it ensures a tidy fee for thepredatory lender when the home buyer flips the loan; and second, it deters theconsumer from repaying the loan too soon, which ensures a certain level of profitfor the lender. IIn the payday loan context, the anti-payment penalty serves the same twopurposes. First, when a consumer cannot repay the loan, the loan rolls over and afee is collected by the payday lender. Second, rather than serving as a deterrent toearly payment, like it does in home-lending, the anti-payment penalty makes itvirtually impossible for many consumers to make the full payday loan payment. 3This again ensures a significant profit for the payday lender from the consumerwho must rollover her loan.1 4

f. Waiver of Meaningful Legal RedressMany payday lenders incorporate mandatory binding arbitration agreementsinto payday lending contracts in order to eliminate any meaningful avenue of legalredress available to the borrower. ' The three payday lending agreements Iobtained in conducting research for this Article contain binding arbitration

agreements.6

As argued in Part IV, infra these agreements deny the paydaylending customer the opportunity to have her case heard in court and suggest thatthe payday lending industry targets and takes advantage of entire classes ofconsumers.

11 See Eggert supra note 3, at 518 ( Predatory [home] lenders include large prepayment penalties..112. See id In practice, when employed by predatory lenders, prepayment penalties are designed toeither trap the borrower, forcing her to remain in an inequitable loan, or to reward the lender with an

unreasonable payoff when an unwitting borrower refinances the loan. ).113. See Spector, supra note 37, at 967 ( Multiple transactions result in the average payday borrowerpaying $793 in principal and interest to repay a $325 loan, creating a debt-cycle that is difficult tobreak. ).

114. See Knize, supra note 46, at 322 (reporting that ninety percent of the revenue generated in thepayday lending industry comes from interest and other fees charged by borrowers).115. See e.g. Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 442-43 (2006) (providingpayday loan agreement excerpt containing arbitration provisions). See generally Tara Shinnick,Annotation, State Regulation of Payday Loans 29 A.L.R. 6TH 461 (2007) (providing helpfulbackground information on cases involving payday loan arbitration agreements).116. In conducting research for this Article, I obtained three payday lending agreements witharbitration clauses readily available at retail locations in Idaho. One agreement is from Rent-A-Center,

and one from Check into Cash, both national companies. The third agreement is from Easy Choice, alocal Idaho lender. All three agreements are on file with the author.

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C. Payday LendersDeliberately TargetMinority BorrowersAdvocates for the payday lending industry claim that when payday lendersmarket their fringe banking products, they do not target any specific class of

customers. 7 Studies overwhelming indicate, however, that the payday lenders dotarget minority consumers, and in particular those with African American andHispanic backgrounds. 8 In addition to these two racial groups, there is strongevidence that payday lenders target members of the military. 19 he significance ofthis fact will be analyzed in section IV, in a discussion about the failure of thegovernment to effectively regulate the payday lending industry.Payday lenders know their most profitable customer base-cash-strappedconsumers with little financially savvy-and market to them directly, offering products they do not need and cannot afford. '20 They find these consumerslargely in minority neighborhoods and establish storefronts in these neighborhoodsin numbers disproportionate to other types of lending institutions.' 2 Business plansdeveloped by payday lenders specifically promote targeting migrant workers andwelfare recipients entering into the workforce.'22 African Americans, in particular,account for a significant portion of the payday lending customer base, 23 andpayday lenders make strong efforts to reach out to the African American

117. ee ASSAF ORON, UNIV. OF WASH, EASY PREY: EVIDENCE FOR RACE AND MILITARY RELATEDTARGETING IN THE DISTRIBUTION OF PAY-DAY LOAN BRANCHES IN WASHINGTON STATE 3 (Mar.2006), available at http://www .stat.washington.edu/assaf/WashPayDay.pdf ( 'Pay-day' businesses haverepeatedly denied any race-, military- or even poverty-related targeting ....) citation omitted).

118. See WEI LI ET AL., CTR. FOR RESPONSIBLE LENDING, PREDATORY PROFILING: THE ROLE OFRACE AND ETHNICITY IN THE LOCATION OF PAYDAY LENDERS IN CALIFORNIA 10 (Mar. 26, 2009),http://www.responsiblelending.org/califomia/ca-payday/research-analysis/predatory-profiling.pdf (finding that paydaylenders in California concentrate their storefronts in predominantly African American and Latinoneighborhoods).

119. Goulet, supra note 39, at 82; see also Oron, supra note 117, at 19 (alleging, for instance, thatpayday lenders target large military bases in Washington) (emphasis omitted).120. See Knize, supra note 46, at 325 ( Payday lenders know where to find their desired customers:economically disadvantaged areas, towns near military bases, and minority neighborhoods. ) (citation

omitted).121. See Michael Stegman, The Public Policy Challenges of Payday Lending 66 POPULAR GOV'T

16 17-18 Spring 2001) (concluding that check cashers and payday lenders are not scattered throughoutcities but are more likely to be located in high-minority and working-class neighborho ods). Relative topopulation, there are one-third as many banking offices and more than four times as many check-cashingoffices in high-minority neighborhoods as in low-minority neighborhoods. Id citation omitted).122. See Factv Fiction: The Truth bout Payday Lending Industry Claims CTR. FOR RESPONSIBLE

LENDING (Jan. 1 2001), http://www.responsiblelending.org/payday-lending/research-analysis/fa ct-v-fiction-the-truth-about-payday-lending-industry-claims.htm ( 'There are 40 million Americanhouseholds with incomes of $25,000 or less that need convenient check cashing [and] quick availabilityof micro loans between $50 and $300 Moreover, this market is expected to grow over the nextdecade; especially those households that are leaving the rolls of welfare for employment. ime ofyear is important Tax season and Xmas offer [more payday loan] activity; summers can be slowerbut could be greater if your community grows with migrant worke rs. ') (quoting payday lendingbusiness plans that target discrete sections of the population).

123. See LI ET AL. supra note 118, at 19 (finding a clear pattern of payday lenders deliberatelytargeting African Am ericans).



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HOW THE PAYDAY PREDATOR HIDEScommunity. 124

Studies and surveys by various governmental agencies and independentorganizations strongly support the assertion that the payday lending industry targetsminority customers. These surveys and studies repeatedly and consistentlydemonstrate that payday lenders are actively targeting and marketing to minoritycustomers, with a strong bias towards African Americans. Take, for example, theSurvey of Consumer Finances ( SCF ), a triennial survey conducted by the FederalReserve Board, designed to capture data relevant to the financial characteristics ofAmerican families. 25 In 2007, the SCF gathered its first data about the use ofpayday loans by respondents. 26 [T]he 2007 SCF data illustrate[s] that minoritiesdisproportionately utilized payday lenders in 2007. ' 127 The data also indicates thatAfrican Americans make up a larger share of payday customers than of the generalpopulation. 128Critics suggest that an analysis of the racial composition of the payday lending

customer base does not in itself suggest any targeting of minority borrowers;however, a significant number of other studies bolster this inference. In a studyrecently published by the Center for Responsible Lending, Predatory Profiling:The Role of Race and Ethnicityin the Location ofPayday Lenders in California129researchers sought to determine what role race and ethnicity plays in the location ofpayday lending storefronts. 30 The study found that, at least in California, AfricanAmericans and Latinos represent a disproportionately high number of paydayborrowers. '' This disproportionate [composition of the payday lenders'] marketshare is even more significant in light of the fact that African Americans andLatinos are much less likely to have a checking account than whites-a basicrequirement for getting a payday loan. 3 2 Data from the SCF also reveals that onein five African American or Latino residents do not have a bank account (ascompared with only five percent of white residents). I

124. See SHEILA BAIR, ISENBERG SCH. OF MGMT. U. OF MASS., LOW-COST PAYDAY LOANS:OPPORTUNITIES AND OBST CLES 8 (June 2005),http://www .aecf.org/upload/publicationfiles/fes3622h334.pdf ( Indeed, payday industry leaders havemade a concerted effort to reach out t the African-American community through, for instance, financialeducation initiatives, and partnerships with traditionally black colleges. ).

125. See AMANDA LOGAN CHRISTI N E. WELLER, CTR FOR AM. PROGRESS, WHO BORROWSFROM PAYDAY LENDERS? AN ANALYSIS OF NEWLY V IL BLE DATA 1 4 2009),http://www.americanprogress .org/issues/2009/03/pdf/paydaylending.pdf (discussing the SCF surveyand its methodology generally).

126. Id.127. Id at 7.128. Id129. LI ETAL. supra note 118.130. ee id. at 7 ( The central purpose of this paper is to understand how race and ethnicity influence

[the payday lenders' determination of where to place their storefronts] .... ). 31 ee id. at 4 ( In California and elsewhere, a disproportionate share of payday borrowers come

from communities of color. The California Department of Corporations recently released a survey ofpayday borrowers showing that, while they represent about a third of the overall adult population, overhalfof payday borrowers are African American or Latino. ) (citation omitted).

132. Id.133. Id. The report states:[W]hile less than five percent of payday loan-eligible adults in California are African American, they

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TEMPLE POLITICAL & CIVIL RIGHTS LAW REVIEWPayday lender locations in California are nearly eight times more concentratedin African American and Latino neighborhoods than white neighborhoods; 3 4 evenafter factoring in controlling variables like income, payday lenders are still 2.4times more concentrated in African American and Latino communities.

35Onaverage, the payday lender nearest the center of an African American or Latinoneighborhood is almost two times closer than in a largely white neighborhood.1 36The high concentration of payday lenders in these neighborhoods enables suchlenders to collect nearly $247 million a year in fees from the communities'residents. 7Research conducted in other regions of the country bears similar results. Astudy mapping the location of payday lenders in eight Illinois and Louisianacounties found, for example, that payday lenders set up storefront in poorerneighborhoods and in communities with higher concentrations of minorities thantheir county of location as a whole; a lender-mapping study in Arizona depicted

similar patterns. 3 8 Two separate studies conducted in North Carolina also showeda high density of payday lending offices located in minority neighborhoods. ' Itcomes as no surprise, then, that low-income African American families in NorthCarolina are more likely to take out a payday loan.14 Statistical analyses of data

make up 18.7 percent of all payday borrowers. Similarly, 25.6 percent of payday loan-eligible adults areLatino, but they represent about 37 percent of payday borrowers. In contrast, white borrowers represent44.5 percent of the eligible population, but just 36 percent of borrowers.Id.134. See LI ET AL. supra note 118, at 10 ( Not only are payday lending storefronts located in orcloser to communities of color, payday lenders also tend to cluster in these areas, with more stores in agiven African American and Latino neighborhood than a neighborhood with a greater share of whitehouseholds. Payday lenders are nearly eight times as concentrated in neighborhoods with the largestshare of African American and Latinos as areas with the lowest concentrations of these groups. ).

135. Id. at 14.136. See also id. at 14 (finding that payday lenders cluster in closer proximity to neighborhoods with

a higher proportion of people of color, renters, adults, lower educational attainment, and non-Englishspeakers).137. See id. at 12 ( This clustering of payday lending storefronts results in the draining of nearly$247 million in fees from African American and Latino households in California. ).

138. See Steven M. Graves, Landscapes ofPredationLandscapesofNeglect: LocationAnalysis ofPaydayLenders and Banks 55 PROF'L GEOGRAPHER 303, 311 (2003) (mapping Louisiana and Illinoislender locations); AMANDA SAPIR & KARIN UHLICH S.W. CTR. FOR ECON. INTEGRITY, PAY DAYLENDING IN PIMA COUNTY, ARIZONA II (Dec. 2003), http://economicintegrity.org/pdf/SCElReportOnPayDayLendingRELEASEDI .pdf (mapping locations of payday lending storefronts in Pima County,Arizona, and finding that thirty-seven percent of lender locations lie within a quarter-mile of areas witha high percentage of Latinos).139. See Michael A. Stegman & Robert Faris, Payday Lending: Business Model that EncouragesChronic Borrowing 17 ECON. DEV. Q. 8, 13 (2003) (finding one third as many banking offices andmore than four times as many check-cashing offices in neighborhoods that were at least 70% minority asin neighborhoods that were less than 10% minority); KING ET AL. supra note 37, at 2 (reporting thatAfrican American neighborhoods have three times as many [payday lending] stores per capita as whiteneighborhoods, and noting that this disparity increases as the proportion of African-Americans in aneighborhood increases).

140. See Stegman & Faris, supra note 147, at 17 (confirming that lower income African Americanfamilies in North Carolina are more than twice as likely to have taken out a payday loan in the past twoyears than have white, non-Hispanic families).

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gathered in Washington state 141nd in Illinois likewise suggest that payday lenderschoose locations that in predominantly minority communities. 142The collection practices of payday lenders further support the argument thatpayday lending storefronts are located disproportionately in predominantlyminority neighborhoods. In Hunting Down the Payday Loan Customer: he DebtCollection Practicesof wo Payday Loan Companies, the study analyzed courtfilings about payday lenders' attempts to collect payday loans that were indefault. 143 The findings showed that nearly seventy percent of defaultingAmericash borrowers with pending or completed court cases were located inpredominantly minority ZIP codes, marked by low- or moderate-income; nearlyninety percent of cases involved borrowers located in predominately minoritycommunities of any income. 144 While it is important to take into account othervariables, such as unemployment and poverty rates when determining thesignificance of such a figure, the fact that ninety percent of the collection casesoccurred in mostly minority ZIP codes strongly suggests a heightened presence ofpayday lending storefronts in those ZIP codes.

When the exceptionally harmful and predatory nature of the payday lendingindustry is coupled with the industry s marketing strategies that target minoritycustomers, an ominous reality becomes clear: the dangers and harms of paydayloans are disproportionately directed towards minorities, just as the profits of thispredatory industry are disproportionately extracted from the minority customerbase.

II. THE USE OF CONSUMER ARBITRATION AGREEMENTS BY THE PAYDAY L N INGINDUSTRY

Arbitration agreements in consumer contracts are a relatively newphenomenon in the legal world. These agreements were introduced in the 1990s,primarily by the credit card industry. The turn of the century saw an explosive risein the use of consumer arbitration agreements and now virtually every consumer issubject to multiple arbitration agreements through credit cards, cellular phoneplans, and a host of other consumer-oriented services. '

141. ORON, supra note 117, at 19 ( Therefore I conclude that from my analysis emerges a clearpattern of 'pay-days' deliberately targeting African-American population centers in Washington State.As mentioned earlier these localities also have disproportionately large numbers of other nonwhiteethnic groups, and other vulnerable social groups, which may also be perceived as 'pay-day' targets.However, on the Census-definedracialcategorylevel, only blacks emerge as a clear-cut target.Theyare, so to speak, the 'spotted owls' of social statistics. ) (emphasis added).

142. ew erms for Payday Loans: High Cost Lenders Change Loan erms to Evade IllinoisConsumerProtections,R INV STM NT ALERT 25 (Woodstock Inst., Chicago, IL), Apr. 2004, at 5.

143. MONSIGNOR JOHN EGAN CAMPAIGN FOR PAYDAY LOAN REFORM, supra note 61, at 1144. Id at 6 (emphasis added); see also MONSIGNOR JOHN EGAN CAMPAIGN FOR PAYDAY LOAN

REFORM, GREED: AN IN DEPTH STUDY OF THE DEBT COLLECTION PRACTICES, INTEREST RATES, ANDCUSTOMER B SE OF A MAJOR ILLINOIS PAYDAY LENDER 10 (Mar. 2004), http://ohiocathconf.org/I/EJ/greedreport.pdf ( [C]ustomers sued by Americash are overwhelmingly located in areas that are over75% ethnic minority. ).

145. Stephen J. Ware, Paying the Price of Process: JudicialRegulation of Consumer ArbitrationAgreements, 2001 J. DISP RESOL. 89, 89 (2001) (hereinafter Ware, Paying the Priceof Process .

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Just as the use of arbitration agreements proliferated through variousconsumer service providers, the payday lending industry adopted the practice aswell.146 I have personally obtained payday lending agreements from three paydaylenders, and each one contains an arbitration agreement. The use of arbitrationagreements by the payday loan industry is problematic for several reasons. Thepredatory nature of the industry, the vulnerable minority populations it, and thecomplicated nature of some of these arbitration agreements are all reasons thatmilitate strongly against their use by the payday loan industry. This section of thearticle will analyze the use of arbitration agreements by the payday loan industry. Itwill begin with a broad overview of the debate surrounding the use of consumerarbitration agreements, and then analyze the use of such agreements by the paydayloan industry specifically. This Part concludes with the argument that the use ofarbitration agreements by the payday loan industry insulates and furthers theindustry s discriminatory practices.A. The Debate over ConsumerArbitrationAgreements

The use of consumer arbitration agreements is the subject of significant debatein industry advocacy groups, academia, and the judiciary. Those in favor of theseagreements tend to be pro-business, freedom-of-contract advocates, while thoseopposed are generally advocates for consumers. While there is merit to argumentson both sides of the debate, consumer arbitration agreements ultimately present toohigh a risk of loss of effective avenues of redress for consumers in general.Specifically, in the payday lending arena, the agreements are especially nefariouslegal tools that permit payday lenders to further their discriminatory and predatorypractices.

I have previously argued that the main benefits of consumer arbitrationagreements, as perceived by consumer-related industries, are increased efficiencyin dispute resolution and the reduction of risk exposure to consumer legal claims. 47The common belief is that arbitration agreements are appealing to consumerindustries because they reduce the overall cost of litigation to a company, as well aseffectively reduce the time it takes to reach a legal resolution of a claim. 141Compared to the procedures embodied in the federal rules of civil procedure, theprocedures for arbitrating a claim are fairly streamlined. 49 This is one important

146. See Michael A. Satz, Mandatory Binding Arbitration: Our Legal History Demands BalancedReform 44 IDAHO L. REV. 19, 52 (2007) (discussing the negative repercussions of arbitrationagreements in the payday loan industry).

147. See id. at 25-35 (discussing the pro-business benefits of arbitration agreements in consumercontracts).

148. See Stephen J. Ware, Arbitration under Assault: Trial Lawyers Lead the Charge, 433 CATOINST POL'Y N LYSIS 1,2 (Apr. 18, 2002) (hereinafter Ware, Arbitration under Assault (claiming that [plarties using arbitration generally find that it saves them time and money in comparison withlitigation. Arbitration is typically quick, inexpensive, and confidential. ); see also Stephen A. Broome,An Unconscionable Application of Unconscionability Doctrine: How the California Courts AreCircumventing the FederalArbitrationAct 3 HASTINGS Bus. L. J. 39, 41 (2006) ( The speed and costsavings of arbitration derive from a focus on early resolution of the dispute, less formal procedures...and simplified discovery. ).149. Compare JAMS, THE RESOLUTION EXPERTS, COMPREHENSIVE ARBITRATION RULES



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factor that leads to the reduction of time and costs of using arbitration rather thaninstituting an action in court.

Another efficiency gained through arbitration is the ability to nurture andidentify regional pools of arbitrators educated in the type of consumer transactionthat a company is likely to bring to arbitration. 10 These arbitrators are more likelyto be experienced practitioners within the particular area of law where thearbitration claim falls. Additionally, this limited pool of experienced arbitratorscreates a repeat-player effect that benefits the companies seeking arbitration in twoways. First, the company has the opportunity to educate several arbitrators in aregional pool about the specific consumer transaction at issue. '5 As the arbitratorsbecome more educated, the arbitrations become more efficient because the time ittakes to educate a particular arbitrator about the specifics of the transaction at issueis reduced.'52 Second, the company itself has the opportunity to gauge how theindividual repeat player arbitrators perform in a given region. The company canthen, in effect, educate itself on the positive or negative outcomes of casesarbitrated in front of certain arbitrators and choose its arbitrators accordingly.'53There is no doubt that business-savvy arbitrators with a pecuniary interest in repeatbusiness are likewise benefited by this repeat-player phenomenon.

In addition to efficiency, another reason consumer businesses perceive

PROCEDURES 7 (2010), available at http://www.jamsadr.com/files/Uploads/Documents/JAMS-Rules/JAMScom prehensivearbitrationrules-2010.pdf (describing rules for private comprehensivearbitration procedures), AM. ARBITRATION. ASS N, COM. ARB. R. MEDIATION P., (2009), availableathttp://www.adr.org/sp.asp?id=22440 (describing rules for arbitration and mediation of large, complexcommercial disputes), and NAT'L ARBITRATION FORUM, CODE OF PROC. (2008), available athttp://www.adrforum.com/resource.aspx?id=1426 (describing rules for arbitration of commercial andconsumer disputes), with FED. R. Civ. P. (describing the federal rules for civil lawsuits).

150. See Carrie Menkel-Meadow, Do the Haves Come Out Ahead In Alternative JudicialSystems? Repeat Players in ADR 15 OHIO ST. J. ON DIsp. REsOL. 19, 36 (1999) (stating that whenselecting an arbitrator from arbitration service providers, [d]isputants also may choose from privaterosters of repeat play third party neutrals .... .

151. See Broome, supra note 148, at 41 (asserting that the repeated use of an arbitral forumgenerates institutional knowledge over a particular subject matter and enhances the forum's ability toresolve a company's disputes as efficiently as possible. ).

152. See id. (describing the enhanced efficiency of an educated arbitral forum ).153. This second opportunity depends upon the specific rules of the arbitration provider being used.

For example, under the American Arbitration Association (AAA) rules, a company will be able toemploy a method similar to a peremptory strike against an arbitrator that has ruled unfavorably in thepast. However, under the National Arbitration Forum (NAF) rules, the arbitrator will be assigned by theNAF; the business can use one strike, but then m ust rely upon disqualification requests. Compare AM.ARBITRATION AS'N., supra note 149, at M-4 ( If the parties have not agreed to the appointment of amediator ... the mediator shall be appointed in the following manner: (a) The AAA will send to eachparty a list of mediators from the Panel of Mediators. The parties are encouraged to agree to amediator from the submitted list and to advise the AAA of their agreement. (b) If the parties are unableto agree upon a mediator, each party shall strike unacceptable names from the list, number theremainingnames in orderof preference,andreturn the list to theAAA. ') emphasis added), with NAT'LARBITRATION FORUM, supra note 156, at 29 R. 21(C) ( For Common Claim Hearings, the Forum shallsubmit one Arbitrator candidate to all Parties making an Appearance. A Partymaking an Appearancemay remove one Arbitrator andidateby filing a notice of removal with the Forum .... A Partymakingan Appearance may request disqualificationof any subsequent Arbitrator in accord with Rule 23. )(emphasis added).

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arbitration as advantageous is the mitigated risk of loss that arbitration andarbitration agreements can provide. The primary benefit here is the reduction ofrunaway jury verdicts that the repeat-player phenomenon ensures. 14 By placing theoutcome of an arbitration case in the hands of an arbitrator educated in that fieldand motivated to be rehired as a future arbitrator, companies reduce the risk of adisproportionately high award to a victorious consumer.'55 Limiting the use of civilprocedures also yields a cost-savings opportunity in arbitration. 5 6 Discovery inarbitration is often non-existent, or at least severely limited, compared to a courtcase. 57 This leads to savings or reduction of risk from two avenues: the expense ofdiscovery is greatly reduced, and the consumer is often unable to obtain documentsin support of her claim against the company, weakening her ability to prove, andthus win, her arbitration claim.Arbitration also mitigates loss because it deters or prevents consumers frombringing claims in the first place. The cost of filing an arbitration claim is oftensignificantly more expensive than filing a claim in court; 18 indeed, consumers whocannot afford the filing costs upfront are denied the opportunity to bring theirclaims.' Additionally, many arbitration agreements contain contractual provisionsthat provide that the losing party must pay the victor s attorney s fees and costs.Such provisions can have an in terrorem'6 effect that strongly dissuades

154. See Jean R. Stemlight CreepingMandatory Arbitration: Is It Just?, 57 STAN. L. REV. 1631,1651-52 (2005) (explaining that companies who gain experience through repeated arbitrations becomerepeat players and do somewhat better in arbitration than the nonrepeat player ).

155. See Ware, Arbitrationunder Assault, supra note 148, at 3 (arguing that arbitrators are unlikelyto deliver off-the-wall verdicts sometimes issued by jurors).156. See Ware, Paying the Price of Process, supra note 145, at 90 ( [A]rbitration can reduce theamount of discovery available to consumer-plaintiffs, thus reducing the amount of time and moneybusinesses must spend on the discovery process .... ).

157. See, e.g., AM. ARBITRATION ASS'N., supra note 156, at R. 21 (The sole rule pertaining todiscovery for arbitrations proceeding before the AAA is Rule 21, Exchange of Information, which statesthat [a]t the request of any party or at the discretion of the arbitrator, consistent with the expeditednature of arbitration, the arbitrator may direct ... the production of documents and other information,and . the identification of any witnesses to be called .... At least five business days prior to thehearing, the parties shall exchange copies of all exhibits they intend to submit at the hearing.... Thearbitrator is authorized to resolve any disputes concerning the exchange of information. ).

158. CTR. FOR RESPONSIBLE LENDING, CRL ISSU PAPER NO. 8, SEPARATE AND UNEQUAL JUSTICE:THE CASE AGAINST BINDING MANDATORY ARBITRATION FOR HOMEBUYERS (Feb. 24, 2005),available at http://www.responsiblelending.org/media-center/press-releases/archives/ip008-CaseAgainst _Arbitration-0205.pdf. The cost to file a claim valued at $150,000 in federal court is$150, which is comprised solely of the court filing fee. Id. The cost to file the same claim with theNational Arbitration Forum, by way of comparison, is $16,050. Id. That cost includes a filing fee, a feeto request amendment, subpoena, discovery order time extension, continuance from arbiter, request forexpedited hearing, two full days of hearings, a post-hearing memorandum, a written opinion withconclusions of law, and a dispositive order. Id. In short, in order to obtain the same services that onewould expect from a court of law for a filing fee of $150, a consumer in an arbitration before NAFwould need to pay over 100 times that amount. Id.

159. See Ware, Paying the Price ofProcess,supra note 145, at 90 ( [A]rbitration can deter claimsagainst businesses by requiring consumer-plaintiffs to pay arbitrator fees, as well as filling fees thatexceed the filing fees in litigation. ).160. The term in terrorem is defined as [b]y way of threat; as a warning. BLACK'S LA WDICTIONARY 839 (8th ed. 2004).

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HOW THE PAYDAY PREDATOR HIDESconsumers with colorable claims from filing an arbitration claim out of fear thatthey will be required to pay the other side s fees if the claim is unsuccessful.Arbitration agreements also often contain class action waivers that deterlawsuits and significantly mitigate the company s risk of loss associated withlitigating, and perhaps losing, such a suit. 161 The deterrent lies in the fact that thevalues of the individual claims that would comprise a class action are not worthpursing on an individual level and thus would not be economically viable but forthe class action mechanism. 162 These waivers mitigate the risk that a company willface expensive and protracted class action litigation.Finally, by using arbitration clauses, companies can reduce the risk of the lossof goodwill capital and lessen the burden of aggressive regulatory action.Arbitration agreements are, by definition, private. 63 By resolving disputesprivately, a company can avoid negative publicity otherwise garnered by thepotential public display often generated by a court case. 6 Additionally, a companycan include a non-disclosure clause in the arbitration agreement that limits theability of the parties to the arbitration to publicize the case. This privatization effectalso benefits companies by increasing regulators' transaction costs to police thecompanies' collective activities,' 65 This in turn limits the exposure that a companymight have to regulatory enforcement actions.

The end result from the corporate perspective is that the improved efficienciesand cost-mitigating effects of arbitration agreements can significantly reduce theimpact of civil lawsuits on day-to-day business operations.166 There is, however, apowerful and growing voice of opposition to the use of such agreements in

161. See Ware, Paying the Price of Process supra note 145, at 94 (noting that some businesses usearbitration clauses to preclude class actions); see also Myriam Gilles, Opting Out of Liability: TheForthcoming Near-TotalDemise of the Modern Class Action 104 MICH. L. REv. 373, 391-93 (2005)(generally describing the failure of judicial and legislative attempts to curtail class action litigation andthe corresponding emergence of class action waivers in mandatory arbitration agreements withconsumers).

162. See Ware, Paying he Priceof Process supra note 145, at 94 ( Businesses can incur substantialliability in consumer class actions, both in cases that provide significant relief to the class and in casesthat provide insignificant relief to the class but significant fees to plaintiffs' lawyers. ); see alsoJ. MariaGlover, Beyond Unconscionability:Class Action Waivers and Mandatory ArbitrationAgreements 59VAND. L. REv. 1735, 1746 (2006) ( Class action waivers are viewed by these companies as a way 'todefend themselves' from consumers who are 'ganging up on' companies through the leverage inherentin the aggregation of large numbers of claims. ).

163. See NAT'L ARBITRATION FORUM, supra note 156, at 4 ( Arbitration proceedings areconfidential unless all Parties agree or the law requires arbitration information to be made public. ); AM,ARBITRATION ASS'N., supra note 149, at R, 23 ( The arbitrator and the AAA shall maintain the privacyof the hearings unless the law provides to the contrary. ); JAMS, THE RESOLUTION EXPERTS, supra note149, at 27 R. 26(a) ( JAMS and the Arbitrator shall maintain the confidential nature of the Arbitrationproceeding and the Award, including the Hearing, except as necessary in connection with a judicialchallenge to or enforcement of an Award, or unless otherwise required by law or judicial decision. ).

164 See Ware, Arbitration under Assault supra note 148, at 4 (arguing that one of the benefits ofconsumer arbitration is its confidential nature, which avoids the prying eyes of business rivals, voyeurjournalists, and lawyers who might stir up copycat lawsuits. ).

165. See Ware, ArbitrationunderAssault supranote 148, at 4 (The confidential nature of arbitration is particularly valuable to parties who want their disputes resolved discretely .... ).

166. See Ware, Paying the Priceof Process supra note 145, at 90 ( Relative to litigation, arbitrationprovides opportunities for such a business to save on its dispute-resolution costs. )

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consumer transactions. 67 As with many things in the law, the yin and yang ofarbitration agreements is that what is very good for one side, namely thecorporations, also works significant negative effects on the other side, theconsumers. 168 Because of the significance of these negative effects on consumers,many scholars and consumer advocates are pushing strongly for banning, or at leastseverely limiting, the use of arbitration agreements in consumer contracts. 9While the private nature of arbitration agreements mitigates risks forbusinesses, it simultaneously increases the risks to consumers and to society as awhole. By keeping these disputes private, the benefits of public vigilance are lost,or at the very least, severely restrained. For instance, even if mandatory arbitrationwere beneficial to consumers who brought claims, one could argue that it wouldstill be detrimental to society in that it curtails the use of public (sometimes jury)trials and eliminates the development of public precedent. ' 70 This public justicecritique rests on the underlying principle that society benefits from the publicexposition of the law. '' The elimination of public resolutions results in a severelylimited public awareness of issues involved in the disputes, and a correspondingrestraint on the ability of institutions charged with protecting the public.Furthermore, consumers, both individually and as groups, are significantlyweakened by the subjugation of their claims to the private dispute resolutionsystem. From the individual consumer's perspective, there is a significant increasein the transaction costs of obtaining information in a private dispute resolutionsystem.'72 First, an individual consumer would likely be unaware of a company'spattern of conduct that systematically employs arbitration agreements.' Second,with the limited discovery available in an arbitration proceeding, an individualconsumer would be severely constrained in her ability to find out the informationneeded to pursue her claim successfully. 7

The transaction cost problem is exponentially amplified when a class actionwaiver is included as a term of the consumer arbitration agreement. The very lowvalue of most consumer claims begets the necessity of pooling consumer claims

167. ee Ware, Arbitrationunder Assault supra note 148, at I (generally reviewing the movement oftrial lawyers against arbitration agreements).

168. ee Stemlight, supra note 154, at 1651-52 (explaining that companies who are repeat players inarbitration may enjoy an advantage over non-repeat players, traditionally the consumer); see lso TRFOR RESPONSIBLE LENDING supra note 158 at 2 (noting that the private nature of arbitration may makeit more difficult for consumers to prove their case).

169. ee CTR FOR RESPONSIBLE LENDING supra note 158 at 2 (arguing against arbitrationagreements in homeowner lending); Glover, supra note 162 at 1747 (arguing against arbitrationagreements in consumer cases).

170. Stemlight, supranote 154, at 1661.171. d172. ee CTR OR RESPONSIBLE LENDING supra note 158, at 2 (criticizing the private nature of

arbitration proceedings, this issue paper points out that [t]his cloaked process means that patterns ofmisdeeds by lenders remain hidden. As a result, other homeowners are denied knowledge that mightfacilitate their claims, while unscrupulous lenders can continue unjust or illegal actions in relativesafety. ).

173. ee Glover, supra note 162, at 1747 (arguing that the use of class action waivers in conjunctionwith mandatory binding arbitration allows businesses to continue corporate misbehavior).174. Ware, aying the Priceof Process supranote 145, at 90 .

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HOW THE PAYDAY PREDATOR HIDESinto a class action lawsuit in order to make individual recovery viable. Thus,consumers are major beneficiaries of the class action system. In fact, one of thetheoretical underpinnings of the class action lawsuit is precisely that the claims arenot valuable enough to be economically worth pursuing as individual claims.

175Bycontractually limiting a consumer s ability to be a member of a class in such a suit,an arbitration agreement virtually ensures that consumers with low-value claims

cannot and will not pursue them against a company protected by the agreement. 16More problems for consumers are apparent when one looks at the arbitrationprocess itself. First, there is a serious loss of accountability when a dispute isresolved in the arbitration process. Case law dictates that even if an arbitratormakes a legal error or decides a case improperly according to the law, a court muststill confirm the arbitrator's award. 177 The status of the law, coupled with the factthat a typical arbitration agreement does not allow for, or severely limits, the abilityto appeal the decision of the arbitrator, almost completely removes anyaccountability that an arbitrator has to the parties in the arbitration and to the publicfor his or her decisions. 7 By limiting the appeals process, both the procedural andsubstantive rights of consumers are placed at a high risk of injury.The repeat-player phenomenon adds yet another layer of potential injustice toconsumers subjected to arbitration agreements. 79 The three interested parties inarbitration are the consumer, the company, and the arbitrator. In all likelihood,consumers are the one party in that group that is not a repeat player to thearbitration game. Consumers neither enter into enough transactions to engage in asignificant number of arbitration proceedings nor do they have sufficient monetaryresources to do so. On the other hand, the company adverse to a consumer inarbitration is more likely to enter into a large number of transactions that warrantmultiple arbitrations.5 0 Compounding the prejudice against consumers inarbitration is the typically small pool of arbitrators in a given region, within an evensmaller pool of arbitration providers, who have the qualifications to hear aconsumer claim. The limited obtainability of arbitrators makes it more likely that

175. Glover, supranote 162, at 1747.176. d177. See e.g. Kyocera Corp. v. Prudential-Bache Trade Servs., 341 F.3d 987, 994 (9th Cir. 2003)

( Neither erroneous legal conclusions nor unsubstantiated factual findings justify federal court review ofan arbitral award under the [Federal Arbitration Act] .... .

178. See generally CTR. FOR RESPONSIBLE LENDING, supra note 158, at 4 (discussing the inherentadvantages that lenders have with arbitrators as opposed to publicly accountable courts).

179. See Lisa B. Bingham, mployment Arbitration:The RepeatPlayerEffect 1 EMP. RTS. & EMP.POL'Y J. 189, 210 (1997) (finding that employees who arbi