Legal-Ease By Janette S. Levey, Esq.

P A G E 6 N E W S L E T T E R 3 2

BEWARE OF PAY DAY LOANS! Today’s economy has unexpectedly placed many people in financially vulnerable positions, some of whom feel compelled to borrow small, short-term loans. Unfortunately, some of those loans not only fail to solve the problem, but may actually make the problem worse. Considering the following scenario:

Martha works for ABC Company and due to the current recession, had to accept a pay cut. As a result, a few days

before her next paycheck is due, Martha finds herself short of cash. Martha has heard that it is possible to get a quick, short-term loan within minutes by applying over the internet with 123cash.com. Martha figures she needs $200 in cash to get her through until payday. She is told that she must have a viable checking account, and that she must write a post-dated check to the lender for $200, plus a fee of $56.00. Within minutes, $200 is wired to Martha’s checking account and Martha is set. Sounds pretty good, right? Let’s look a bit deeper before we come to that conclusion. The above example is most commonly known as a payday loan, also known as “cash advance loans” “check advance loans” and “post dated check loans”. While they offer the advantages of convenience and quick fixes, pay day loans also have a tremen-dous downside. Let’s explore.

What are Pay-day Loans and How Do They Work? Pay day loans are small loans usually between $200 or $300, but generally not more than $1000 that borrowers might use when they find themselves running short of funds. They are short-term loans, meaning that they are usually payable within approximately two weeks, give or take. Typically a borrower writes a post-dated check for the amount he or she is borrowing, plus a fee. The check is left with or sent to the lender, who will cash it once the borrower is ready to pay. Let’s look at the example above, where Martha has taken a payday loan for $200.00, plus a fee of $56.00. Let’s say that Martha has two weeks to pay back the loan. If Martha is able to pay back the loan in two weeks, she pays $256.00 to the lender, for a loan of $200.00. The $56.00 “fee” a.k.a. interest corresponds to an annual percentage rate of 730%, an amount considered usurious in most states (more on that in a bit). What happens if Martha finds that she cannot pay back the loan after two weeks? No problem: Martha can extend or “roll over” the loan. Let’s say Martha extends the loan for another two weeks. There of course, will be a new “fee” to pay up front. Here lies the real trap of payday loans. The original term of the loans, two weeks in our example, is usually so short that very few borrowers will be able to pay it back when it is due. Typically, borrowers find that they have to roll over the loan many times and end up paying more in fees than they originally borrowed. In our example, if Martha keeps rolling over her loan every two weeks for a period of three months, and pays interest and charges of $56 each time, Martha will end up paying $336.00 in interest on a $200 loan--- and still owe the original $200.00.

If that is not bad enough, consider this: Suppose at some point after Martha has rolled over the loan several times, her lender decides to deposit the post-dated check and it bounces. Now, in addition to the $336.00 she has already paid in interest, she has to pay a fee to her bank and---you guessed it--- to the lender. Still not convinced that payday loans present pitfalls? Read on:

Some lenders are particularly unscrupulous and will have the borrower sign a document that allows for automatic debiting of the borrower’s bank account. The lender debits the account and should stop doing so when the loan plus the interest is paid. Unfortunately, consumer complaints of lenders continuing to debit borrowers’ checking accounts long after the original loan is paid off abound. Well, can’t the borrower simply close that account? Maybe not. Many of the loan agreements allowing for the auto-matic debit also provide for a wage garnishment in the event that the borrower wises up and closes his or her checking account. Even though the borrower has probably paid the original loan and the interest multiple times over, s/he now has to fend off a wage garnishment.

As you may have guessed, these scenarios can wreak havoc on a borrower’s credit. If a lender cashes the post-dated check and the check bounces, the borrower may have trouble opening up another checking account or other type of bank account. You will also have negative information on your credit report, which could make it harder for you to borrow money or get credit to pay off the loan.

Legal-Ease By Janette S. Levey, Esq.

P A G E 7 N E W S L E T T E R 3 2

BEWARE OF PAY DAY LOANS...Cont’d!

What can you do to protect yourself from what can be draconian consequences of borrowing through payday loans? Ideally, you may want to consider the following alternatives to pay day loans:

- Small loan from a local credit union, where interest will likely be far lower than a payday loan.

- Ask your employer for a pay advance. - Consider a loan from family or friends and get the terms of the loan in writing. - Request additional time to pay the bill from your creditors instead of taking a payday loan. - Use a credit card advance. While the interest may seem high it definitely will NOT be as high as the interest you will pay on a payday loan. - See if you can get overdraft protection on your bank account, so that if you do not have enough money to cover the check you write, the bank will still pay the check, and you will avoid insufficient funds or returned check fees. - Seek credit counseling. - Seek help in planning ahead to hopefully prevent financial emergencies.

Well, that’s all well and good, but what happens if you are one of those people who has already taken out a

payday loan and you find yourself digging a deeper and deeper financial hole? What can you do? You’re finished, right? No, not necessarily. The good news is that there are several legal claims/defenses that you can use against a payday lender, so let’s look at a few of them.

Truth in Lending Violations: Payday lenders often fail to comply with Truth-in-Lending disclosure requirements. As a re-sult, borrowers do not really understand the true cost of these loans. Payday lenders often try to get around the law by char-acterizing the transaction as something other than a loan. They come up with schemes such as catalog sales or internet ser-vice that attempt to characterize the loan as something else. These disguises may be challenged and courts will often rule that the transaction is really a loan.

State Payday Loan Law Violations: While most states have authorized payday loans, borrowers in those states can often find requirements that the lender has violated.

Usury Laws: All states have usury laws. Usury is the practice of charging astronomically high interest rates and is illegal. The cap on interest rates can vary from state to state. Some states, through their usury laws, essentially render payday loans illegal. New Jersey is one of those states. Other states will have small loan acts, and again, a lender’s non-compliance with those pro-visions can be used as a legal claim or defense. Some states allow payday loans, but require the lenders to comply with the federal Racketeering Influenced Corrupt Organizations Act (R.I.C.O) and state RICO laws as well. Here too, you would have some potential defenses and/or claims against payday lenders.

Fair Debt Collection Laws: Illegal or deceptive debt collection threats, such as threats to arrest borrowers, may violate federal or state fair debt laws. Remember how Martha provided a post-dated check? The federal Fair Debt Collection Practice Act (FDCPA) forbids bill collectors from threatening to deposit a post dated check and prosecute a debtor for passing bad checks. That is one of many illegal or deceptive debt collection practices that a payday lender may use, and against which you may have a claim or defense.

Licensing Violations: Some states have licensing statutes and penalties in the event of a violation. Common Law Claims: These include, fraud, negligence and breach of fiduciary duty. For more information on Pay Day Loans, you may contact the National Consumer Law Center online at www.consumerlaw.org. Remember: Pay Day lenders prey on consumers who are already in a vulnerable position. The current economy has helped to place many of us in such a category. Bottom Line: Beware of Pay Day Loans! By: Janette Levey, Esq.