Perpetuating Poverty: How Payday Loan Companies Take Advantage of Vulnerable Consumers

Jason Stinnett, a bankruptcy and consumer litigation attorney at a non-profit law firm in downtown Baton Rouge, Louisiana, is familiar with the devastating impacts of predatory payday lending. His clientele are mostly Black women, many of whom support families on less than $1,500 a month. To pay for basic living expenses like rent and groceries, some borrow from local consumer finance companies. It is easy to accumulate debt from these loans, but hard to escape it. The interest rates on payday loans in Baton Rouge can reach higher than 33%, and it is not uncommon for companies to sue borrowers for debts that amount to more than their yearly income. [1]

While legal, some of these companies’ tactics are quite aggressive, and it’s possible that some of their practices are more sinister. In order to borrow money from a consumer finance company, the borrower is required to list property they own on a promissory note as security for the debt. Promissory notes are essentially contracts in which a borrower promises to pay a fixed sum of money. [2] But some of Stinnett’s clients who borrow from payday lenders claim they never owned any of the property, or only some of the property, listed on their promissory notes. In a review of publicly available promissory notes at the local district court, Stinnett saw the same fact pattern emerge, again and again. Six iPads. Diamond earrings. 2018 Toshiba laptops worth $1500. Stinnett collected dozens of promissory notes of dubious provenance. [3]

While some of the promissory notes are unremarkable or indeterminable, others appear to be the product of contrivance. Stinnett believes that in some instances, the borrower, consumer finance company, or possibly both list overvalued or fictitious property. Under the Louisiana Civil Code, the number of expensive chattels or “moveables” listed can increase the amount of the loan that the consumer is qualified for; however, the amount to repay also increases with high interest rates. [4] The consumer might benefit from a “generous” loan to begin with, but later, they can be sued by their consumer finance company for their debt. The consumers are then less able to defend themselves against these companies without inculpating themselves in civil, or perhaps even criminal, liability, as they attested to the truth of the promissory note with their signature. [5] Moreover, because the consumer finance companies themselves are often borrowers from larger and more established financial institutions, they sell the promissory notes in both intra- and interstate commerce, which might constitute wire fraud if the property listed on the note is indeed overvalued or fictitious. [6]

However, even if these consumer finance companies are committing fraud, with or without the aid of their borrowers, the most that Stinnett could do is report the issue to governmental agencies and advise his clients to file for bankruptcy. Why?

Many of Stinnett’s clients have signed binding contracts that state courts are not eager to disturb. The federal Truth in Lending Act (TILA) regulates the sale and advertisement of loans. One of TILA’s main tenets is that consumers have the right to read what the terms of a loan are before they sign a contract. [7]  In turn, the “duty to read” doctrine presumes that if a consumer signs a contract, then they have read and understood its terms. Therefore, if a consumer signs a promissory note, it is enforceable, except in some extreme cases of unconscionability and fraud. [8] It appears that the actions of these consumer finance companies might constitute an extreme case of fraud, but because their consumers are implicated, it is unlikely that they will complain. 

Moreover, although TILA dictates that the disclosure of loan terms must be meaningful, they are notoriously difficult to read. A 2019 study by two scholars in the Boston College Law Review found that the readability of consumer standard form contracts is comparable to articles published in academic journals. [9] This phenomenon is particularly dangerous in states like Louisiana, where only 24.9% of people above 25 have achieved a bachelor’s degree or higher and 17.8% live in poverty. [10] For comparison, in 2021, 37.9% of Americans above 25 had achieved a bachelor’s degree or higher, and in 2020, 11.4% of Americans lived in poverty. [11, 12] Consumer finance companies often entice vulnerable consumers with the promise of quick cash, even going so far as to mail unsolicited promissory notes that look like checks. At best, they profit off of high interest rates and indecipherable loan terms that drive their consumers into bankruptcy. But there is also a possibility that consumer finance companies take away any path of judicial recourse for their consumers by implicating them in fraud. 

Suspicious lending practices do not appear to be uncommon in Baton Rouge, which raises the question of how common they are nationally. The Pew Charitable Trusts found that 12 million people take out payday loans every year. [13] How can we better protect financially vulnerable people from predatory payday lending?

Moving from a “duty to read” doctrine to a “duty to understand” doctrine has the potential to save consumers from bankruptcy. Emphasizing consumer understanding, instead of enforcing predatory loan terms merely because the consumer was supposed to read them, would place more pressure on lenders to comply with meaningful disclosure. As Aiyanna Washington has argued in The Journal of Race, Gender, and Poverty, whether a consumer reads a contract does not determine whether they will understand the contract. The readability of loan terms and consumer literacy must be considered where contract law is concerned. [14] 

Moreover, people living in poverty need an expanded social security income system to prevent them from becoming involved with predatory lenders in the first place. Consumers who may attest to owning fictitious property are doing so to survive. When a person’s lack of basic necessities forces them into such a precarious position, it is clear that their government should be doing more to support them.

As it stands, impoverished people in Louisiana and throughout the United States lack sufficient governmental protection from predatory payday lending. Although predatory lending practices are somewhat shrouded in complicated legalese, the consequences are played out in people’s lives every day. Insurmountable debt destroys homes, families, and financial futures; but often, there are few options other than predatory loans for those in the midst of financial crisis. In order to solve this problem, more light must be shed on predatory lending practices, and we must provide improved assistance for our most financially vulnerable populations.

Edited by Sofia Marie Matson

Sources:

[1] Promissory Notes from Consumer Finance Companies (on file with author).

[2] UCC § 3-104 (defining “negotiable instruments”). Online at https://www.law.cornell.edu/ucc/3/3-104 (accessed August 29, 2022). 

[3] Promissory Notes from Consumer Finance Companies (on file with author). 

[4] “Louisiana Bankruptcy Exemptions.”  Louisiana Bankruptcy Law. Accessed August 29, 2022. http://www.louisianabankruptcylaw.com/exemptions.html.

[5] 8 U.S. Code § 1324c (a) (defining “document fraud”). Online at https://www.law.cornell.edu/uscode/text/8/1324c (accessed September 26, 2022).

[6] 18 U.S. Code § 1343 (defining “fraud by wire, radio, or television”). Online at https://www.law.cornell.edu/wex/wire_fraud (accessed August 29, 2022).

[7]  15 U.S. Code § 1601 (a) (dictating “meaningful disclosure” of loan terms). Online at http://uscode.house.gov/view.xhtml?req=granuleid%3AUSC-prelim-title15-chapter41-subchapter1&edition=prelim (accessed August 29, 2022).

[8] Aiyanna Washington, Living in a Pool of Sharks: How TILA and the ‘Duty to Read’ Fail to Protect Financially Vulnerable Borrowers from Predatory Lending Practices, 11 Journal of Race, Gender, and Poverty 179 (2020).

[9] Uri Benoliel and Shmuel I. Becher, The Duty to Read the Unreadable, 60 B.C.L. Rev. 2255 (2019).

[10] “Quick Facts: Louisiana.” U.S. Census Bureau. Accessed August 29, 2022. https://www.census.gov/quickfacts/LA

[11] “Census Bureau Releases New Educational Attainment Data.” U.S. Census Bureau. February 24, 2022. https://www.census.gov/newsroom/press-releases/2022/educational-attainment.html

[12] Emily Shrider, et al. “Income and Poverty in the United States: 2020.” U.S. Census Bureau. Last modified September 14, 2021.  https://www.census.gov/library/publications/2021/demo/p60-273.html

[13] Joe Valenti and Eliza Schultz, “How Predatory Debt Traps Threaten Vulnerable Families.” American Progress. Last modified October 16, 2016. https://www.americanprogress.org/article/how-predatory-debt-traps-threaten-vulnerable-families/

[14] Washington, supra note 7.