Copyright (c) 2001 University of Cincinnati Law Review
University of Cincinnati

Summer, 2001

69 U. Cin. L. Rev. 1257

LENGTH: 20053 words

TAKING THE PAY OUT OF PAYDAY LOANS: PUTTING AN END TO THE USURIOUS AND UNCONSCIONABLE INTEREST RATES CHARGED BY PAYDAY LENDERS



NAME: Charles A. Bruch*

BIO:

*Associate Member, 2000-2001 University of Cincinnati Law Review.



SUMMARY:
... The payday loan industry is the fastest growing segment of the "fringe credit market. ... Though Justice Harlan Stone stated that unconscionability is the foundation for "practically the whole content of the law of equity," determining exactly what constitutes an unconscionable transaction is not always easy. ... A. History and Demographics of the Payday Loan Industry ... The payday loan industry further asserts that its loans are reasonable and that most customers do not renew loans due to an inability to repay. ... But these quotes are provided almost exclusively by the payday loan industry. ... By affiliating with a national bank located in a state that has favorable interest rate regulations, a payday lender can charge any interest rate allowed by that state on any loan it offers anywhere in the country. ... The payday loan industry's delivery of "one of the most expensive consumer products in existence" is growing at an alarming rate. ... To stem this momentum, and to prevent the payday loan industry from becoming indelibly entrenched in American society, Congress needs to act quickly. ... Two pieces of federal legislation have been proposed to corral the runaway payday loan industry. ...

TEXT:
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I. Introduction



Her eighth grade education didn't take her very far. So when her job sorting jeans at a garment factory didn't pay the bills, 47-year-old Patricia Turner went to E-Z Check Cashing of Cookeville, Tennessee (E-Z). 1 E-Z loaned her $ 300 for thirty days, and Turner secured the loan by writing a check for $ 405, $ 105 of which was for interest and "Other Charges." 2 The Annual Percentage Rate (APR) on this loan was over 400%. 3



At the end of the thirty-day period, Turner was unable to repay the loan. 4 She did not have enough money in the bank to cover the check or enough cash to pay the debt outright. 5 She could have defaulted, but instead she chose to extend the loan by paying a cash extension fee of $ 105. 6 Then she extended it again. And again. After she extended the loan eight times, paying $ 840 over an eight-month period without reducing the principal of the loan, she was unable to pay either the balance of the loan or an additional extension fee. 7 With full knowledge that there were insufficient funds in her account to cover it, E-Z then deposited Turner's eight-month-old check into its account. 8 When the check bounced, Turner was forced to declare bankruptcy. 9



The payday loan industry is the fastest growing segment of the "fringe credit market." 10 Unlike the loan that Patricia Turner took out with E-Z [*1258] Check Cashing, however, most payday loans are offered for a period of two weeks or less. 11 Loan amounts are usually under $ 1000, 12 and APRs range from 390% to 7300%, with an average of 500%. 13 To screen prospective borrowers, lenders usually require only that borrowers have a personal checking account and a job. 14 Borrowers secure their loans by writing a check for the principal of the loan plus interest and fees or by making similar arrangements for an Electronic Funds Transfer (EFT). 15 This security is provided with the understanding, in most cases, that the borrower does not have enough money in the bank to cover the check or EFT. 16



After receiving a loan, and at any time up to and including the due date, borrowers with sufficient funds can pay the loan off in cash, authorize the lender to cash the check, or authorize the lender to process the EFT. 17 Borrowers with insufficient funds, on the other hand, have three substantially different options. 18 One is to extend the loan for two weeks by paying interest and extension fees in cash. 19 Another is to take out a new loan with another lender to pay off the original loan. 20 The final option is to do nothing and then deal with the fallout when the lender unsuccessfully tries to cash the check or initiate the EFT. 21



This Comment is concerned with the usurious and unconscionable nature of payday loans. Part II of this Comment will explore the development of the usury doctrine in the United States. The doctrine of unconscionability, which is based largely on state law, will then be discussed in Part III. Part IV will briefly explore some of the more common predatory lending schemes used in the United States, and each of these will be compared to payday lending in Part V. Part V will also chart the history of payday lending, focusing on statistics and demographics, and it will examine the usurious and unconscionable nature of payday loans. Part VI will then briefly review proposed [*1259] federal legislation that targets some of the more objectionable characteristics of payday loans. Finally, Part VII will conclude that payday loans are a blight on the financial landscape because they "prey[] on desperate persons in dire need by charging obscene interest rates," 22 and new federal legislation should be enacted to bring interest rates charged by payday lenders into conformance with traditional limits of usury and unconscionability.



II. Usury Regulations Are Designed to Protect Borrowers



Usury, defined by Congress as the charging or receiving of an interest rate in excess of the statutory maximum, 23 has been a problem since the earliest recorded credit transactions over 5000 years ago. 24 While critics of the lending industry point to the predatory practices of lenders who charge exorbitant interest rates, proponents extol the need to promote investment in plant, property, and equipment through interest rates that favor lenders. 25 Recognizing this policy consideration, the courts have decided that usury laws are necessary to protect borrowers from unscrupulous lenders. 26



A. State Usury Regulations



Usury is a creature of statute, regulated at both the state and federal levels. 27 Most states have enacted general usury laws that are rooted in English common law. 28 These statutes help establish interest rate ceilings, and when supplemented by state common law they help define and establish the elements of usury. 29 For example, Florida Statute section 687.03 establishes the interest rate ceiling by declaring it illegal and usurious for anyone to charge an interest rate greater than 18%; 30 [*1260] Florida common law then identifies the specific elements that create liability under the statute. 31



States' general usury statutes are usually not at issue, however, because they are normally riddled by a plethora of exceptions that accommodate the wide variety of loans available in the marketplace. 32 For example, there are different usury statutes at the state level for small loans, bank installment loans, commercial installment loans, insurance premiums, auto financing, home improvements, revolving credit, life insurance, auto title loans, check cashing, and last but not least, payday loans. 33 The spectrum of allowable maximum interest rates for these exceptions is broad, ranging from 2.5% for government-issued checks in Pennsylvania 34 to 780% for payday loans in Wyoming. 35 States also have at their disposal Unfair and Deceptive Acts and Practices (UDAP) statutes that deal with usury in situations where a lender's overall business practices are found by courts to be deceptive. 36 Additionally, many states have adopted usury statutes modeled after the Uniform Small Loan Laws, 37 and some states have adopted specific payday loan statutes. 38



Analysts tend to group the states into three categories. 39 Category I states require payday lenders to comply with usury restrictions in the state's small loan and criminal usury statutes. 40 Twenty states, Puerto [*1261] Rico, and the Virgin Islands comprise Category I. 41 Category II includes eight states that allow payday lenders, although not specifically authorizing them through specific payday loan statutes, to charge any interest rate they want. 42 This authority is subject only to each state's small loan statutes. 43 Category III includes twenty-two states and the District of Columbia, and these jurisdictions have specific payday loan statutes. 44 While the existence of these special usury laws would seem to indicate that payday lenders are constrained by state usury statutes, this indication is misleading. 45 Federal legislation has made it possible for payday lenders to bypass state usury statutes altogether. 46



B. Federal Usury Regulations



Federal usury regulation is comprised primarily of statutes governing residential mortgages, 47 insured banks, 48 federal credit unions, 49 federal [*1262] banks, 50 and other banks associated with the Federal Reserve System. 51 From this cadre of federal legislation, the National Bank Act (NBA) has emerged as the premier enabling statute for payday lenders. 52 The NBA was enacted in 1863 to even the playing field between relatively weak federal banks and burgeoning state banks, and it did this by allowing federal banks to charge customers in other states interest rates limited only by the usury statutes of the state in which the federal bank was physically located. 53 Today this statute allows federal banks situated in states where there are no interest rate restrictions, and payday lenders affiliated with these banks, to charge their customers any interest rate they choose, even if the customers reside in other states that have restrictive usury statutes. 54 This process is called "exportation." 55 In addition to being available to federal banks, exportation is available to federally insured state banks and credit unions through legislation similar to the NBA. 56



Another federal statute that is critical to payday lenders is the Truth in Lending Act (TILA). 57 TILA was adopted in 1968 to standardize the mechanism for communicating the terms of consumer credit agreements, 58 which in turn serves to advise borrowers of the cost of credit. 59 This act addresses such issues as disclosure statements given to borrowers before accepting credit, identification of the amount financed, total finance charges, and the APR. 60 TILA also defines credit as "the right to defer payment of debt or to incur debt and defer its payment." 61 This definition, which has remained static since the advent of payday loans, has not been routinely invoked in payday loan litigation. 62 Perhaps in response to the belief that this definition is relevant to such [*1263] litigation, the Federal Reserve System added an official staff commentary to TILA in May 2000 that specifically recognizes payday loans as a form of credit. 63



A final federal statute sometimes invoked against usury is the Racketeering Influenced and Corrupt Organizations Act (RICO). 64 RICO was passed in 1970 to combat organized crime, prevent the corrupt operation of businesses and its resultant impact on interstate commerce, and discourage racketeering. 65 Despite its apparent inapplicability to commercial credit, one provision in RICO defines usury as providing credit at a rate that is at least double the maximum rate allowed by state or federal law, 66 and this provision has been utilized with varying success against payday lenders. 67



III. The Test for Unconscionability Is Subjective



Unconscionability is a product of statute and common law. 68 It has been defined through Uniform Commercial Code (UCC) § 2-302 in the context of commercial transactions for goods, 69 it has been defined and applied through the common law of most states, 70 and it has been incorporated into virtually all credit-related state legislation. 71 Though Justice Harlan Stone stated that unconscionability is the foundation for "practically the whole content of the law of equity," determining exactly what constitutes an unconscionable transaction is not always easy. 72



The Restatement (Second) of Contracts (Restatement) makes it clear that the doctrine of unconscionability exists to prevent oppression of [*1264] parties and to eliminate unfair surprise. 73 Assessment of the unconscionability of a given transaction requires an evaluation of the purpose of the transaction, the setting in which it was made, and the end result of the transaction. 74 The analysis must focus on public policy considerations, and it must also look for evidence of fraud, duress, undue influence, and misrepresentation. 75 Additionally, the evaluation must consider the transaction at the time it was consummated and should not consider subsequent events that manifest impropriety on the borrower. 76 The Restatement also charges that although inadequacy of consideration is often a component of an unconscionable credit transaction, inadequacy of consideration by itself does not constitute unconscionability. 77 Moreover, agreements utilizing standardized forms are particularly suspicious if terms of the agreements are not actively negotiated. 78 Finally, the Restatement summarizes its position by describing unconscionability as something "such as no man in his senses and not under delusion would make on the one hand, and as no honest and fair man would accept on the other." 79 Various other treatises agree with these principles of unconscionability. 80



A. Substantive Unconscionability



The doctrine of unconscionability is comprised of two components: substantive and procedural. 81 Substantive unconscionability deals with the terms of an agreement, applying to cases where an agreement is so one-sided as to "shock the conscience." 82 For example, courts have held [*1265] that charging a fee for cashing a check that is five times higher than the industry average shocks the conscience, 83 as does charging 200% APR for a short-term loan 84 or 35% weekly interest for a small loan. 85 An agreement may also shock the conscience if the seller knows that the buyer will gain nothing from the sale or if a lender knows that the borrower will probably be unable to repay the loan. 86 Also, since most agreements and contracts incorporate risks for all parties, substantive unconscionability looks for an inequitable distribution of these risks. 87 But, as the treatises note, an inequitable distribution of risks by itself does not render an agreement unconscionable; there must be procedural unconscionability as well. 88



B. Procedural Unconscionability



Procedural unconscionability focuses on oppression or surprise during contract negotiation. 89 To find procedural unconscionability in a con-tract, courts must evaluate the relative bargaining strength of the parties to ensure that they exercised a meaningful choice. 90 Determining whether the parties exercised a meaningful choice requires the court to consider such factors as intelligence, education, income, and the level of financial distress the parties were experiencing when they entered into the contract. 91 Additionally, procedural unconscionability incorporates various UDAP and TILA-related considerations, such as whether any forms or contracts involved in the negotiations were incomplete or difficult to understand. 92 Consideration of these factors helps the courts determine whether all parties to a contract have a full understanding of the contents of the contract. 93 To protect adhesion contracts 94 from [*1266] being branded as unconscionable on a per se basis, 95 courts have held that procedural unconscionability by itself is not enough to render an agreement void; the agreement must violate the substantive prong as well. 96



IV. Payday Lending-the Newest Member of a Long Line of Predatory Lending Schemes



A. Pawn Shops



There have been predatory lenders as long as there have been borrowers. 97 The oldest form of small consumer loan is the pledge of a personal asset, or "pawnbroking." 98 With pawnbroking, a typically economically underprivileged borrower "pledges" a piece of tangible personal property to a pawnbroker who in turn provides a loan based on the value of the property. 99 The seller is given the option to repurchase the property, but if he does not exercise this option the pawnbroker retains the right to sell the property. 100 When this happens, the borrower's debt to the pawnbroker is extinguished. 101 If the borrower elects to repurchase the property, the pawnbroker is free to set the price. 102 One study has shown that the typical markup for a one-month pawn is 25%, which translates into an APR of 300%. 103 In most states, pawnbroking is not subject to usury statutes because pawnbroking is considered a "buy-sell" business and "buy-sell" transactions are not classified as loans. 104



B. Loan Sharks



Loan sharking is unquestionably the most predatory, and the most illegal, form of short-term consumer loan. 105 Organized crime's second [*1267] biggest moneymaker is characterized by usurious loans on one level and extortionate collection practices on another. 106 These extortionate collection practices, where a person who is late making payment, or that person's family, is severely beaten, killed, or forced to commit criminal acts to escape the violence, are the hallmark of loan sharking. 107 It is these extortionate collection practices that make people pay $ 14,000 in interest on a $ 1,900 loan, or $ 100,000 interest on a $ 30,000 loan, or $ 5,000 in interest payments on a $ 5,000 loan. 108 But it is the usurious interest rates, not the extortionate collection practices, that make people unable to pay. 109 It was in response to this travesty that Congress enacted RICO and outlawed loan sharking as a racketeering activity. 110 Under RICO, a loan is considered usurious and unlawful if its interest rate is at least double the statutory usury rate and the lender is considered an enterprise. 111



C. Salary Selling



Another way people used to quickly get short-term cash was through salary selling, a practice popular at the beginning of the twentieth century. 112 Salary selling was a short-term solution that often came with long-term headaches. 113 In a classic example, a borrower took out a five dollar loan on Monday and then turned his six dollar paycheck over to the lender on Friday. 114 If the borrower was not assured of a Friday [*1268] paycheck, the lender would force him to write a bank check for the amount of the loan plus interest, even if he had no bank account. 115 This gave the lender added security; if the borrower defaulted, the lender would deposit the check and then prosecute the borrower for writing a bad check. 116 Although interest rates on these loans ranged from 270% to 955%, 117 advocates defended salary selling by claiming that lenders were buying wages or check proceeds at a discount, and as such these transactions qualified as "buy-sell" transactions and fell outside the scope of usury statutes. 118 With the passage of the Uniform Small Loan Laws in the early 1900s, 119 however, salary selling was legally branded as a type of cash loan 120 and salary sellers were effectively put out of business pursuant to state usury statutes. 121



D. Title Pawns



Title pawns are another high-interest vehicle for obtaining fast cash. 122 In this relatively new scheme, borrowers who own their cars outright can pawn them, or, more accurately, they can pawn the titles to their cars, for cash. 123 If a borrower defaults on a loan, the lender is entitled to repossess the car and keep all proceeds from the subsequent vehicle sale, regardless of the outstanding loan balance. 124 In the seminal case involving this type of loan, a lender advertised a transaction as "Pawn your title, keep your car." 125 After the borrower was unable to make payments on the resultant loan and its 977% APR, 126 the District Court for the Southern District of Alabama ruled in favor of the borrower and held that title pawns are credit transactions subject to TILA and usury restrictions. 127 The court based its decision on the fact that the pawnbroker did not take possession of the car. 128 The Alabama Supreme Court later restated this position, holding that title pawns fall within the auspices of the Alabama Pawnshop Act and are not subject [*1269] to usury restrictions. 129 Still another approach was taken by the Georgia Supreme Court, which recently held that title pawns fall under the ambit of Georgia's usury laws and its pawnshop statute. 130 As the foregoing illustrate, the status of title loans is far from settled. 131



E. Rent-To-Own



One of the newest forms of consumer lending, realizing almost $ 5 billion in revenue in 1999, 132 is rent-to-own (RTO). 133 Electronics, appliances, furniture, and computers are the standard object of RTO agreements, and these agreements are characterized by the RTO industry as leases that renters can cancel at any time. 134 The lease period is typically one week or one month, and after a certain number of lease periods, usually 78 weeks, the renter has the option to purchase the leased item. 135 If the renter decides to purchase, some agreements require payment of the fair market value, 136 others require a nominal payment, 137 and still others require no additional payment above and beyond the lease payments already made. 138 Irrespective of the purchase price, however, RTO purchases usually entail an overall payment, including rental payments, of one-and-a-half to twelve times the price that cash-paying customers pay, 139 and some critics assert that these contracts do not adhere to TILA requirements. 140 In response to these charges, regulation of the RTO industry is being hotly debated at both the federal and state levels. 141 Forty-four states currently have RTO statutes classifying RTO contracts as unsecured lease transactions that are not subject to usury statutes. 142 Although Congress is leaning [*1270] towards enacting similar legislation, 143 federal courts have consistently held that RTO agreements are secured credit transactions that are subject to usury regulations. 144 In addition to this conflict at the federal level, the Supreme Court of Minnesota recently held an RTO contract to be usurious, a move that flew in the face of that state's RTO-friendly statute. 145



V. Payday Loans Trap Borrowers in a Usurious and Unconscionable Cycle of Debt



A. History and Demographics of the Payday Loan Industry



Although payday lending can be traced indirectly to salary selling, 146 most authorities credit W. Allan Jones with giving birth to the modern payday loan industry in 1993. 147 Mr. Jones opened his first Check Into Cash in Cleveland, Tennessee in 1993, 148 and the industry has since blossomed into 10,000 payday loan establishments generating an anticipated $ 2 billion in revenue in the year 2000. 149 By 2002, the market is estimated to explode to 25,000 stores and $ 6.75 billion in annual revenue. 150 This $ 6.75 billion in revenue will be fueled by $ 45 billion worth of loans secured through 150 million transactions. 151 With net profits hovering around 30%, it is hard to imagine a slowdown in the market anytime soon. 152 Payday loans are now available, or will soon be available, at traditional payday loan stores, gas stations, pawn shops, convenience stores, ATM machines, dedicated kiosks, and the Internet. 153

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Not all payday loans are called payday loans. 154 They are often labeled "cash advances," "deferred deposits," "deferred presentment," or "check loans." 155 In Texas, lenders will buy your appliances from you and then lease them back to you at a premium. 156 Other lenders will give you a quick loan as long as you "buy" an advertisement in an underground publication that no one reads. 157 In Florida, a firm unsuccessfully claimed that it was buying and selling checks, just as a pawnbroker buys and sells used watches. 158 And finally, in Georgia you can write a check and exchange it with a payday lender for cash and worthless mail order gift certificates. 159 With all of these transactions, however, the borrower is required to write a check to the lender that is typically held for two weeks before being cashed. 160



According to representatives of the payday loan industry, the average customer is a 35-year-old member of the middle class, makes over $ 30,000 a year, has lived at the same residence for almost five years, and has an active checking account. 161 Over one in three of these customers is a homeowner, 162 and 60% are women. 163 Often employed as construction workers, teachers, and nurses, these people choose payday loans as a "simple but sophisticated cash flow decision." 164 They only need a small amount of cash for a short period of time to help pay emergency short term expenses. 165 Countering this all-American image, however, the industry also admits that most customers live on the verge of financial ruin, living from paycheck to paycheck. 166 One payday lender even went so far as to describe his customers as "desperate [*1272] persons in dire need." 167 Furthering this less-than-wholesome image of the typical payday loan customer, and in conflict with the statistics provided by the payday loan industry, the Federal Reserve Bank of Boston found that check cashing outlets in the Boston area are clustered in poverty-stricken areas and check cashing outlets outnumber banks in these areas by a ratio of twelve-to-one. 168 This more realistic characterization of the clientele of payday lenders is supported by an Illinois class action lawsuit in Illinois describing class members as "poor and unsophisticated." 169



The payday loan industry further asserts that its loans are reasonable and that most customers do not renew loans due to an inability to repay. 170 It describes payday loans as a convenient, low-cost option for short term financing, particularly when compared to the cost and incon-venience of bouncing a check. 171 The average duration of a payday loan is two weeks, and the average loan amount is $ 255. 172 Interest rates for these loans are often quoted as 15% 173 or 25%, 174 with a default or renewal rate somewhere under 15%. 175 But these quotes are provided almost exclusively by the payday loan industry. 176 Other groups have determined that the interest rates on payday loans range from 390% to 7700%, with an average of 500%. 177 Moreover, these groups have found the default rate to be much higher than that quoted by the industry; in a study conducted in Indiana in late 1999, researchers found a default rate of 77.2%. 178 This cycle of default and accom-panying loan renewal extends the duration of an average two-week loan to almost five months. 179 This study also found that the average payday loan customer renews his loan approximately ten times, and one borrower renewed his loan sixty-six times. 180

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B. Payday Loans Create Continuing Obligations



Borrowers do not get trapped on a "debt treadmill" with pawnbroking, title pawns, or RTO agreements. 181 When customers turn pawns over to pawnbrokers, they get money with no strings attached. 182 A customer can forfeit his pawn and walk away from the transaction with no liability whatsoever, effectively rendering the transaction a cash sale to the pawnbroker. 183 Title pawns are similar to regular pawns in that borrowers can walk away from transactions and sacrifice only their pawns. 184 In both cases the debt is completely extinguished through surrender of the pawn and the borrower is subject to no further legal obligations. 185 RTO contracts are similar to pawnbroking and title pawns in this respect, and they offer the easiest escape clause for borrowers; since these contracts are considered "at will," an RTO company can simply repossess its merchandise if a renter fails to make timely payments. 186 As with pawnbroking and title pawns, there is no residual debt when borrowers default on RTO contracts and there is no need for borrowers to continue paying interest fees and loan extension charges. 187



With payday loans, however, there is no easy way out. 188 A borrower cannot simply surrender his security and walk away; he remains legally obligated to pay the principal, interest, and extension fees on the loan, and he must deal with the consequences if a lender tries to cash his usually worthless post-dated check or initiate his equally worthless EFT. 189 This inability to walk away is what separates payday loans from the other legal predatory lending schemes discussed above, and it is also what makes payday loans ominously similar to illegal lending schemes such as salary selling and loan sharking. 190 It is this inability to pay, where a borrower overextends himself on a loan and is forced to make payment where payment is impossible, that forces desperate people to [*1274] perform desperate acts. 191 These desperate acts include, among other things, criminal behavior perpetrated to generate the cash a borrower needs to keep his creditors at bay. 192 When all of these factors are taken into consideration, it is easy to see the potential these loans have to exploit vulnerable segments of society, and it becomes obvious that society should treat payday lending with the same trepidation that it treats loan sharking and salary selling. 193



C. Payday Loans Are Usurious



1. Disguised Loans Are Exposed Through the "Substance Test"



One way payday lenders avoid prosecution for usury is by characterizing their product as something other than consumer credit. 194 "Deferred presentment" is one of these deceptive recharacterizations. 195 Some payday lenders claim that all they do is cash checks for customers and then wait two weeks to present the checks to the customer's bank. 196 In other words, they defer presentment of the check to the issuer's bank. 197 This deferral is described by payday lenders as being ancillary to the primary transaction, and since the primary transaction is check cashing, the entire transaction is not credit. 198 Therefore, they argue, payday loans categorically do not fit under the umbrella of "credit" as defined by TILA. 199



A number of courts have mounted an attack against this ruse. 200 To prevent desperate people from getting smothered by overwhelming financial commitments, the courts look to the substance of an agreement over its form to determine if the transaction is a loan. 201 The courts will subject a transaction to the various usury regulations if it determines that the substance of the transaction is a loan. 202 The courts have found the [*1275] substance of a transaction to be a loan when a person receives cash in exchange for a promise to make a larger cash payback later. 203 Using this logic, the courts are now consistently holding that deferred presentment transactions are loans subject to usury, RICO, and TILA regulations. 204



This "substance test" also exposes other subterfuges posited by payday lenders. 205 For example, some payday lenders claim that they are pawnbrokers who buy and sell post-dated checks. 206 As pawnbrokers, they claim they are shielded from usury regulations by pawnbroker statutes. 207 The courts disagree. 208 Once again, looking to the substance of the transaction, courts have held that these loans are not buy-sell transactions and are not exempt from usury regulations. 209 The courts have also applied the substance test to customers who write post-dated checks in exchange for unredeemable gift certificates and cash. 210 Finally, the courts have exposed transactions in which a person writes a post-dated check for cash and worthless advertisements in a low-distribution fringe periodical, 211 and it has also exposed agreements where a person sells his furniture to a lender who in turn leases it back to the seller at a premium. 212 In all of these scenarios, the borrower receives cash in exchange for the promise of a larger payback later. 213 Applying the substance test, the courts have found that all of the above transactions are consumer loans subject to state and federal usury statutes, RICO, and TILA. 214 Moreover, although the new Federal Reserve official staff commentary is not binding and has not yet been [*1276] tested in a court of record, its use should substantially reinforce the substance test. 215



2. All Costs of Credit Must Be Included in the APR



Some payday lenders muddy the waters by designating only a small portion of their charges as interest, labeling the residual portion extension fees, check cashing fees, service charges, or other charges. 216 This has left the courts with the burden of determining which fees qualify as interest, and they have looked to TILA for guidance. 217 TILA defines interest as any charge related directly or indirectly to the extension of credit, 218 and it specifically identifies service fees, transaction fees, activity fees, loan fees, and debt cancellation fees as interest. 219 Since the fees charged by payday lenders often do not follow the same naming conventions as TILA, the courts have adopted a test to determine whether a particular fee is interest. 220 This test asks whether a customer paying cash would incur the charge, or if the charge is reserved for credit customers only; if the charge is reserved for credit customers only then it is considered interest. 221



Using this test, the courts have almost universally held that the various fees and charges assessed by payday lenders are interest. 222 And since TILA requires that all interest and finance charges be incorporated into APR calculations, this recharacterization of fees and charges as interest has had a profound impact on the APR of most payday loans. 223 Patricia Turner paid loan origination fees and extension fees of $ 105 on her $ 300 loan. 224 The lender labeled $ 99 of these as "Other Charges" and $ 6 as interest, thereby reporting an APR [*1277] of 24% on the credit agreement. 225 Although the case has not yet been decided on its merits, the court ruled on a motion for summary judgment that the entire $ 105 payment was interest. 226 This ruling recast the APR of the loan to its true value of over 400%, which is usurious under almost any standard. 227 Furthermore, this decision proactively classified the nebulous fees hidden by lenders in credit agreements as interest, and perhaps more importantly, it classified loan extension fees as interest. 228 To counteract this affront to their industry, however, it is safe to assume that payday lenders will continue to devise creative new methods of depicting their fees as non- interest charges. 229 It is also safe to assume that these depictions will continue to hide from borrowers interest rates that are clearly in violation of state and federal usury statutes. 230



3. Interest Rate Exportation Opens the Door to Usury



Interest rate exportation creates a safe haven for payday lenders and their usurious interest rates. 231 By affiliating with a national bank located in a state that has favorable interest rate regulations, a payday lender can charge any interest rate allowed by that state on any loan it offers anywhere in the country. 232 The lender effectively becomes immune to charges of usury. 233 Eagle National Bank, a federally chartered bank headquartered in Pennsylvania, was able to capitalize on the lack of interest rate regulation in Pennsylvania in the late 1990s to make $ 31 million in loans outside of Pennsylvania. 234 The average APR [*1278] on these loans was 454%. 235 In addition to Eagle National, at the end of 1999 there were six national banks partnering with payday lenders, and other banks and thrift institutions were considering it. 236 Since some of these national bank "partners" contribute nothing more than their state's usury regulations, or lack thereof, these arrangements have been dubbed "rent-a- bank." 237



This ability to legally extend loans at usurious interest rates has been called the "exportation octopus." 238 It reaches across state lines and nullifies a state's well-crafted usury laws and exposes its citizens to the almost unfettered discretion of payday lenders. 239 It also provides such an impenetrable statutory shield to payday lenders that those who use it do not even try to disguise their transactions or fees. 240 In bitter opposition to exportation, however, those outside the payday loan industry challenge whether exportation of usurious interest rates to people living paycheck-to-paycheck is what Congress envisioned when it passed the National Bank Act in 1863, 241 and they argue that "[b]anks should not be in the business . . . of inducing bank customers to write bad checks to borrow money at loan-shark rates." 242



D. Payday Loans Are Unconscionable



1. Substantive Unconscionability



There are two reasons why payday loans are substantively unconscionable. First, these loans are one-sided, with extremely high [*1279] interest rates that cannot be justified through cost-benefit analysis. 243 Second, payday lenders know they are taking advantage of a segment of society that in most cases is ill-equipped to repay its loans. 244



a. Payday Loans Are One-Sided



Payday loans are substantively unconscionable because they are one- sided. 245 Advocates of payday lending attempt to justify the high fees through a number of analogies, with the more popular of these comparing payday loans to bounced checks. 246 The logic of this analogy is simple; without payday loans, borrowers would have no choice but to write bad checks, and bad checks lead to non-sufficient-fund (NSF) charges and penalties. 247 With NSF fees of $ 50 per check, so the reasoning goes, payday loans are a relative bargain, and as such the high interest rates that lenders charge are justified. 248 But this attempt to bolster the attractiveness of payday loans is short-sighted because studies have found that most people in financial distress, a common characteristic of payday loan customers, do not write bad checks. 249 Furthermore, writing bad checks is illegal, and payday lenders should not justify their business by declaring it to be only a shade more respectable than criminal activity. 250 Finally, this whole argument draws attention away from the critical issue in the controversy; payday lenders are charging an APR between 390% and 7300%, 251 and this by itself is enough to render any agreement one- sided. 252

[*1280]

Another analogy compares payday loans to taxi rides. 253 This analogy asserts that taxis are for short trips only, and for short trips the fares are reasonable. 254 For longer trips, however, such as from New York to San Francisco, the fares are outrageous. 255 Likewise, as advocates aver, a payday loan with its corresponding fees is reasonable for short-term financing, but as a long-term financial vehicle payday loans are unattractive. 256 Although this argument is more logical than the bounced-check analogy, it too is short-sighted because it fails to mention that 77% of payday loan customers are using this lending scheme, or more appropriately, are getting trapped into this lending scheme, for the long-haul. 257 They are repeatedly taking taxis from New York to San Francisco. 258 Given this reality, payday lenders have failed to adequately define a significant enough benefit to borrowers or a substantial enough risk to lenders to justify the exorbitant interest rates. 259 This lack of quantifiable, risk-based justification suggests that no such justification exists, and it indicates that these loans are balanced in favor of lenders, with borrowers being charged interest rates that truly "shock the conscience." 260



b. Payday Lenders Know Borrowers Are Unable to Repay Loans



Payday loans are also substantively unconscionable because they target customers that lenders know are unable to repay their loans. 261 Payday lenders are fully aware that borrower default is almost inevitable, and they are fully aware of the two reasons for this inevitability. 262 The first of these is that borrowers do not make enough money to pay off high-priced loans. 263 One study analyzed the "[a]bility to [r]epay" of borrowers earning $ 25,000 a year and borrowers earning $ 35,000 a year. 264 This study concluded that a person making $ 25,000 a year would, without payments on a payday loan, fall $ 14 a week short [*1281] on recurring payments for food, housing, healthcare, transportation, and utilities, and a person making $ 35,000 would have a weekly surplus of $ 67. 265 These figures do not include emergency payments for car repairs or medical treatment, which points to the second major factor contributing to the high default rate of payday loans; the two-week duration of most payday loans does not give borrowers a chance to recover from the problem that sent them to the payday lender in the first place. 266 As previously illustrated, borrowers start out with an extremely small surplus. 267 To give them only two weeks to accumulate enough money to pay off a loan, and to leave them with nothing to pay for emergencies that may arise during the life of the loan, is an untenable proposition. 268



Though payday lenders are aware of the industry's high default rate, they insist that their customers like the product. 269 Apparently, lenders believe that people like Patricia Turner enjoy paying $ 840 interest on $ 300 loans and then declaring bankruptcy. 270 With an industry default rate of 77%, cases like Turner's are commonplace. 271 Moreover, not only do lenders encourage financially desperate people to seek payday loans in the first place, but they encourage borrowers to prolong their ride on the "debt treadmill" by extending loans or by taking out new loans to pay off old ones. 272 This leads to the piling of new loans, extension fees, and interest on top of the original principal, fees, and interest, which in turn multiplies the debt, the effective interest rate, and, most significantly, the improbability of a borrower escaping the perpetual debt spiral of payday loans. 273 Lenders do this with confidence because most of the risks, other than the 2.6% bad debt write-off inherent to payday loans, have been shifted to borrowers through their post-dated checks. 274 These checks give lenders the simple, efficient, and powerful option of pursuing civil and criminal bad [*1282] check charges against borrowers, which in some jurisdictions include treble damages. 275



2. Procedural Unconscionability



Payday loans are procedurally unconscionable for two reasons. First, in many cases borrowers are so desperate for cash that they are willing to accept credit at any cost. 276 Second, payday lenders often confuse borrowers through deceptive, misleading, and incomplete loan applications and credit disclosures. 277



a. Borrowers Do Not Exercise a Meaningful Choice



The main reason that payday loans are procedurally unconscionable is that payday lenders have a captive market for their product. 278 For various reasons, customers of payday lenders have nowhere else to turn for money; they often have no family to borrow from, they may have a bad credit record, or they are unable or unwilling to wait for mainstream lenders to approve their loan. 279 Also, mainstream lenders may not offer the smaller loans that borrowers want. 280 Whatever the reason, people go to payday lenders as a last resort. 281



In addition to being in dire financial straits, the typical payday loan customer is often not financially astute and is therefore at a distinct disadvantage during loan negotiations. 282 Although one-fourth of those who frequent payday lenders have some education beyond high school, almost 80% earn less than $ 10 an hour, and a significant portion live on a fixed income. 283 Under similar circumstances, courts have found such borrowers to be unsophisticated consumers who, due to their inferior bargaining position relative to payday lenders, are by definition [*1283] incapable of exercising a meaningful choice. 284 Instead, they are willing to do almost anything to extricate themselves from their financial predicament, and this includes yielding to lender demands and making whatever promises are necessary. 285



This desperation and lack of financial savvy are aggravated by the fact that payday loans are just too easy to get; all a person needs is a checking account and a job. 286 In most cases there are no credit checks and no evaluations of a potential borrower's ability to repay. 287 Whereas the payday loan industry asserts that this permissiveness fails to shield lenders from bad borrowers, critics point out that it insidiously fails to shield bad borrowers from lenders. 288 Certainly, consideration of these factors makes it clear that in many payday loan transactions borrowers do not exercise a meaningful choice. 289



b. Credit Agreements Are Often Misleading



Payday loans are also procedurally unconscionable because credit agreements for payday loans are often deceptive adhesion contracts that borrowers must accept on a take-it-or-leave-it basis. 290 To help equalize this disparity in bargaining power, TILA requires that consumer credit agreements contain a number of items relevant to payday loans, including the amount financed, itemization of amount financed, finance charge, APR, payment schedule, total of payments, prepayment charges, late payment charges, and security interest. 291 All terms must be disclosed "clearly and conspicuously," and the APR and finance charge must be disclosed more conspicuously than every other term except the name of the creditor. 292 Failure to display the APR and the finance charge more conspicuously than the other terms is a serious TILA violation. 293

[*1284]

One telephone survey found that only 37% of payday lenders quoted an even marginally accurate APR, mirroring the way lenders report APR on their credit agreements. 294 Supplementing this survey are a plethora of cases that allege TILA violations by payday lenders, with most of these involving lenders who fail to conspicuously disclose material terms of credit agreements. 295 One lender was liable for burying the security provision of its loan in fine-print boilerplate language outside of the "disclosure" section of the agreement. 296 Another lender routinely stapled a receipt to the credit agreement in such a way as to obscure the TILA disclosure, a practice that the Seventh Circuit stated was confusing and misleading. 297 In another case, the court ruled against a lender that advertised the interest rate as a dollar amount rather than a percentage. 298 And finally, where lenders fail to display the finance charge and APR more clearly and conspicuously than the other terms of the credit agreement, the courts have found the credit agreements to be in violation of TILA. 299 TILA violations make it extremely difficult for borrowers to fully understand the specifics of the loans they take out, and the courts have generally classified these contracts as unconscionable. 300



VI. Congress Needs to Act Quickly



The payday loan industry's delivery of "one of the most expensive consumer products in existence" is growing at an alarming rate. 301 [*1285] Fueling this growth are aggressive lobbying efforts that have systematically convinced twenty-two state legislatures to authorize payday lending and its obscene interest rates. 302 This legislation sometimes defies a state's own usury statutes, a situation consistent with the loophole-ridden scheme of usury legislation. 303 And no matter what a state legislates, interest rate exportation has the preemptive power to trample any of its usury-related statutes. 304 To stem this momentum, and to prevent the payday loan industry from becoming indelibly entrenched in American society, Congress needs to act quickly. 305



Two pieces of federal legislation have been proposed to corral the runaway payday loan industry. The first of these is House Resolution 1684, entitled the "Payday Borrower Protection Act of 1999" (HR 1684). 306 This bill, which is currently stalled in a House Subcommittee, has noble intentions in that it attempts to eliminate exportation relative to payday loans. 307 It also requires a two-week loan duration for every $ 50 of principal, and it proposes extensive licensing, reporting, and procedural safeguards. 308 Unfortunately, HR 1684 fails to adequately close the loopholes that payday lenders have been exploiting since 1993. 309 In particular, HR 1684 regulates only what it narrowly defines as "deferred deposit" loans, thereby providing a bypass to all loans that can be cleverly recharacterized as something else, and it does not adequately prevent rollovers and extensions. 310



The second piece of proposed federal legislation is House Resolution 3823, entitled the "Federal Payday Loan Consumer Protection Amendments of 2000" (HR 3823), which has also been referred to a House Subcommittee. 311 This bill is a stripped-down version of HR 1684 that does not address lender licensing or other procedural regulations. 312 Similar to HR 1684, it incorporates a narrow definition [*1286] of "payday loan" that will be easy for the industry to sidestep. 313 HR 3823 also attempts to control exportation, but it does this by preventing FDIC- insured banks from making payday loans 314 and by preventing non-FDIC banks from securing payday loans with checks drawn on FDIC banks. 315 This FDIC restriction does not, however, prevent exportation by non-FDIC national banks if checks used to secure loans are not drawn on FDIC banks, and payday lenders have already demonstrated their knack for building creative detours around this type of roadblock. 316



Federal legislation similar to, but more airtight than, HR 1684 and HR 3823 is required to bridle the payday loan industry. Congress should develop new legislation that does not restrict itself through explicit wording to deferred presentment transactions or payday loans. 317 This new legislation should use the "substance test" undergirded by TILA's recently expanded definition of credit to identify and limit the APR on all consumer personal loans. Furthermore, application of this limit should be independent of the situs of the lending bank. This limit should be only a safety net, however, and there should be room for other regulations to operate underneath it. For example, this limit should be higher than most existing usury rates, to give states flexibility with their own usury legislation, and it should also be high enough to allow federal banks to enjoy the slight interest rate variations envisioned by the drafters of the National Bank Act. But most importantly, this limit should be low enough to fit within traditional boundaries of usury and unconscionability. Finally, pursuant to the restrictions of TILA and relevant case law, the interest rate regulated by this new law should include initiation fees and extension fees. 318



These steps will neutralize the cause of the problems associated with payday loans and not just deal with its symptoms. 319 Additionally, with this approach there will be no need to modify the National Bank Act, to [*1287] regulate the duration of consumer loans, or to outlaw loans secured specifically by personal checks, because an across-the-board interest rate restriction on consumer loans will serve to disarm the "exportation octopus" and assure consumers of a reasonable APR on their loans no matter how many times they extend them. 320 Therefore, under this new legislation, consumer loans by any name will never be usurious and will rarely be unconscionable. This bill should embrace any consistent, more narrowly-drawn state statutes, but it should otherwise be preemptive. 321



VII. Conclusion



Over the past century this country has witnessed a variety of short-term lending schemes that exploit desperate, cash-starved individuals. Payday lending is the latest member of this notorious cast. The payday loan industry is doling out billions of dollars each year through almost 10,000 outlets across the country, with the average loan carrying an APR of 500%. 322 Due primarily to this exorbitant interest rate, large numbers of people, usually those who can least afford it, are getting trapped in the humiliating and costly cycle of recurrent debt associated with payday loans. Unable to repay their loans, they languish in the never-ending two-week cycle of interest charges and extension fees, a cycle that too often ends in criminal charges or bankruptcy.



Payday lenders say they are providing a valuable service that borrowers are entitled to receive. 323 Those outside the industry heartily agree that payday lenders are providing a service; however, they submit that this service is predatory, usurious, and unconscionable, and that in some cases denying credit to an individual is in the individual's best interest. 324 Payday lenders, despite this opposition, are trying to remove themselves from the usury playing field by calling their loans "deferred [*1288] presentment," "check buying," and other equally creative derivations. 325 Even where lenders admit to being loan providers, they hedge on their APR disclosures, if they provide them at all, by characterizing most of their interest charges as "fees." 326 And if they lose both of these arguments, payday lenders sneak in the back door and exempt themselves from usury regulation through the National Bank Act and its interest rate exportation. 327 The net result is loans that are extremely generous to lenders and extremely unforgiving to borrowers. Finally, to make matters worse, lenders know that their customers are unable to repay their loans in a timely fashion, and they also know that borrowers will be helpless against the vicious cycle of debt appurtenant to payday loans.



Fortunately, there is hope. America, through HR 1684 and HR 3823, has already begun to fight back. Although these bills fall short of their target, they are a step in the right direction. Congress needs to quickly take additional steps to prevent payday loans from gaining a permanent foothold in society, a foothold that will undoubtedly be in the wallets of those who can least afford it. Federal legislation needs to deal with the root of the problem, and it should not limit itself to the predatory lender de jure. This legislation needs to limit the APR on all consumer personal loans, regardless of the name, mechanics, or situs ofthe loan. Only through a federal effort of this magnitude can society be adequately protected from payday lenders and their progeny.





Legal Topics:

For related research and practice materials, see the following legal topics:

Banking Law > National Banks > Interest & Usury > Interest


Banking Law > National Banks > Affiliates & Subsidiaries


Contracts Law > Defenses > Unconscionability > Adhesion Contracts



FOOTNOTES:


n1 See Turner v. E-Z Check Cashing, Inc., 35 F. Supp. 2d 1042 (M.D. Tenn. 1999).

n2 Id. at 1046 n.4.

n3 See id. at 1051.

n4 See id. at 1046.

n5 See id.

n6 See id.

n7 See id.

n8 See id.

n9 See id.

n10 Lynn Drysdale & Kathleen E. Keest, The Two-Tiered Consumer Financial Services Marketplace: The Fringe Banking System and Its Challenge to Current Thinking About the Role of Usury Laws in Today's Society, 51 S.C. L. Rev. 589, 604-05 (2000). Two-Tiered System provides an insightful distinction between the primary credit market, consisting of banks and credit unions, which typically make relatively low-risk, low-interest loans to consumers to finance home and automobile purchases, and the secondary credit market which is comprised of high-interest, high-risk lenders offering products such as rent-to-own, title- pawns, and payday loans. Id.

n11 See id. at 602.

n12 See id.

n13 See Kathleen E. Keest & Elizabeth Renuart, The Cost of Credit: Regulation and Legal Challenges 279 (2d ed. 2000).

n14 See id. at 280. Other more thorough and time- consuming credit checks are usually not required. See id. Some payday lenders use a computer system called "Tele-Track" to help ascertain whether borrowers have outstanding payday loans with other lenders. See Senate Forum on Short-Term, High-Interest Paycheck Advances, Before the Senate Comm. on Governmental Affairs, 106th Cong. (1999) (forum held by Senator Joseph Lieberman), available at 1999 WL 1242421, at *44 [hereinafter Lieberman Transcript].

n15 See Drysdale & Keest, supra note 10, at 600-01.

n16 See Turner v. E-Z Check Cashing, Inc., 35 F. Supp. 2d 1042, 1051 (M.D. Tenn. 1999).

n17 See Drysdale & Keest, supra note 10, at 601.

n18 See id.

n19 See id.

n20 See id.

n21 See id.

n22 Gutierrez v. Devon Fin. Servs., Inc., 99 C 2647, 1999 U.S. Dist. LEXIS 19738, at *2 (N.D. Ill. Sept. 29, 1999). This comment was an assertion by the plaintiff which, as the court acknowledged, was not denied by the defendant. See id.

n23 See 12 U.S.C. § 86 (1994).

n24 See Keest & Renuart, supra note 13, at 42.

n25 See id.

n26 See Party Yards, Inc. v. Templeton, 751 So. 2d 121, 122-23 (Fla. Dist. Ct. App. 2000).

n27 See id. at 123.

n28 See id.

n29 See id.

n30 See Fla. Stat. Ann. § 687.03 (West 1999).

n31 See Party Yards, 751 So. 2d at 123. This case defines the elements of usury as follows: "the party must show: (1) an express or implied loan; (2) a repayment requirement; (3) an agreement to pay interest in excess of the legal rate; and (4) a corrupt intent to take more than the legal rate for the use of the money loaned." Id.

n32 See Keest & Renuart, supra note 13, at 45.

n33 See Drysdale & Keest, supra note 10, at 559. This list is not intended to be exhaustive, but is instead exemplary of the types of specific statutes governing transactions for which usury is a concern.

n34 See Jan Lindsey, Pennsylvania Puts a Lid on High Check-Cashing Fees (visited Feb. 28, 2001) <http://www.bankrate.com/brm/news/chk/19980227.asp?keyword=>.

n35 See Jean Ann Fox, Safe Harbor for Usury: Recent Developments in Payday Lending, September 1999 (visited Feb. 28, 2001) <http://www.consumerfed.org/safeharbor.pdf>.

n36 See Keest & Renuart, supra note 13, at 524-25.

n37 See Berger v. State, 910 P.2d 581, 584 (Alaska 1996). The Uniform Small Loan Laws were drafted between 1916 and 1942 to stem the proliferation of loan sharking in the United States. These statutes authorize lenders to exceed usury rates and charge as much as 36% APR for small consumer loans. See Payday Loans: A Form of Loansharking The Problem, Legislative Strategies, A Model Act (visited Mar. 1, 2001) http://www.consumerlaw.org/PayDayLoans/pay-menu.htm>.

n38 See Keest & Renuart, supra note 13, at 281-82; Consumer Federation of America, States Grant Payday Lenders a Safe Harbor from Usury Laws (Sept. 7, 1999) <http://www.consumerfed.org/safeharpr.pdf>; The PIRGs and Consumer Federation of America, Show Me the Money!: A Survey of Payday Lenders and Review of Payday Lender Lobbying in State Legislatures (visited Feb. 20, 2001) <http://www.pirg.org/reports/consumer/payday/index.html> [hereinafter Show Me the Money].

n39 See Keest & Renuart, supra note 13, at 280-81; Show Me the Money, supra note 38, at 23.

n40 See Keest & Renuart, supra note 13, at 280-81. This category includes Alabama, Alaska, Arizona, Connecticut, Georgia, Indiana, Maine, Maryland, Massachusetts, Michigan, New Jersey, New York, North Dakota, Oklahoma, Pennsylvania, Puerto Rico, Rhode Island, Texas, Vermont, Virginia, Virgin Islands, and West Virginia. See id.; Show Me the Money, supra note 38, at 23.

n41 See Keest & Renuart, supra note 13, at 280-81; Show Me the Money, supra note 38, at 23.

n42 See Keest & Renuart, supra note 13, at 281; Show Me the Money, supra note 38, at 23. Included in this category are Delaware, Idaho, Illinois, New Hampshire, New Mexico, Oregon, South Dakota, and Wisconsin. See Keest & Renuart, supra note 13, at 281; Show Me the Money, supra note 38, at 23.

n43 See Keest & Renuart, supra note 13, at 281; Show Me the Money, supra note 38, at 23.

n44 See Keest & Renuart, supra note 13, at 281-82; Show Me the Money, supra note 38, at 23. This category is made up of the following states: Arkansas, Ark. Code Ann. §§ 23-52-101 to 23-52-117 (LEXIS through all 2000 legislation); California, Cal. Civ. Code § 1789.33 (West 1998); Colorado, Colo. Rev. Stat. §§ 5-3.1-101 to 5-3.1-121 (2000); District of Columbia, D.C. Code Ann. §§ 26-1101 to 26-1123 (Supp. 2001); Florida, Fla. Stat. Ann. §§ 560.101-560.310 (1997); Hawaii, 1999 Haw. Sess. Laws, Act 141, § 1; Iowa, Iowa Code §§ 533D.1-533D.16 (Supp. 2001); Kansas, Kan. Stat. Ann. § 16a-2-404 (1995); Kentucky, Ky. Rev. Stat. Ann. §§ 368.010 to 368.991 (Banks-Baldwin 1998); Louisiana, La. Rev. Stat. Ann. §§ 9:3578.1-3578.8 (West Supp. 2001); Minnesota, Minn. Stat. Ann. § 47.60 (Supp. 2001); Mississippi, Miss. Code Ann. §§ 75-67-501 to 75-67-539 (2000); Missouri, Mo. Ann. Stat. § 408.500 (Supp. 2001), Mo. Code Regs. Ann., tit. 4, §§ 11.010-.020 (LEXIS through rules effective Feb. 28, 2001); Montana, Mont. Code Ann. §§ 31-1-701 to 31-1-725 (Supp. 1999); Nebraska, Neb. Rev. Stat. §§ 45-901 to 45-929 (Michie 1998); Nevada, Nev. Rev. Stat. §§ 604-010 to 604-180 (1999); North Carolina, N.C. Gen. Stat. §§ 53-275 to 53-289 (1999); Ohio, Ohio Rev. Code Ann. §§ 1315.35 to 1315.44 (West Supp. 2001); Oklahoma, Okla. Stat. tit. 14A, § 3-508B (1996); South Carolina, S.C. Code Ann. §§ 34-39-110 to 34-39-260 (Law. Co-op. Supp. 2001); Tennessee, Tenn. Code Ann. §§ 45-17- 101 to 45-17-119 (2000); Utah, Utah Code Ann. §§ 7-23-101 to 7-23-110 (Supp. 2000); Washington, Wash. Rev. Code Ann. §§ 31.45.010 to 31.45.900 (West Supp. 2001); and Wyoming, Wyo. Stat. Ann. §§ 40-14-362 to 40-14-364 (Lexis 1999). See Keest & Renuart, supra note 13, at 557-66.

n45 See James J. White, The Usury Law Debate: Article the Usury Trompe l'Oeil, 51 S.C. L. Rev. 445 (2000). This article provides a detailed analysis of exportation, which is the means by which banks offer loans to customers in different states at interest rates restricted only by the state in which the bank is located. See id. at 452.

n46 See id.

n47 See Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDA), 12 U.S.C. § 1735f-7a (1994); Alternative Mortgage Transaction Parity Act of 1982, 12 U.S.C. §§ 3801-3806 (1994).

n48 See Federal Deposit Insurance Act, 12 U.S.C. §§ 1811-1835a (1994).

n49 See Federal Credit Union Act, 12 U.S.C. § 1785 (1994).

n50 See National Bank Act, 12 U.S.C. § 85 (1994).

n51 See Interstate Banking and Branching Efficiency Act of 1994, 12 U.S.C. §§ 36, 43 (1994).

n52 See Keest & Renuart, supra note 13, at 282.

n53 See 12 U.S.C. § 85.

n54 See Marquette Nat'l Bank v. First of Omaha Serv. Corp., 439 U.S. 299, 319 (1978); Keest & Renuart, supra note 13, at 82.

n55 Keest & Renuart, supra note 13, at 82.

n56 See 12 U.S.C. § 1831(d) (1994) (state banks); 12 U.S.C. § 1785 (1994) (credit unions).

n57 15 U.S.C. §§ 1601-1693r (1994).

n58 See Keest & Renuart, supra note 13, at 59.

n59 See Jackson v. American Loan Co., 99 C 2067, 1999 U.S. Dist. LEXIS 9143, at *9 (N.D. Ill. June 10, 1999), aff'd, 202 F.3d 911 (7th Cir. 2000).

n60 See 12 C.F.R. § 226.4 (2001). Precise methods for determining these figures are provided in TILA and Federal Reserve Board "Regulation Z." See id. §§ 226.1-226.33. Regulation Z defines consumer credit as "credit offered or extended to a consumer primarily for personal, family, or household purposes." Id. § 226.2(a)(12). For a detailed list of items that are included and excluded from calculation of the APR, see id. § 226.4(b) (inclusions) and id. § 226.4(c) (exclusions). To see how the APR is calculated, see 15 U.S.C. § 1638(a) (1994).

n61 12 C.F.R. § 226.2(a)(14) (2001).

n62 See id. The absence of this weapon from the litigation battlefield is baffling.

n63 See 12 C.F.R. pt. 226, Supp. 1, § 226.2(9)(14)(2) (2001). This official staff commentary to Regulation Z became mandatory in October, 2000, but it does not change the law; it simply illustrates that payday loans should be considered consumer credit. Since § 226.2(a)(14) has defined credit as a deferred transaction, and because this statute has been in place since the first payday loan store was set up in 1993, it will be interesting to see if this official staff comment, which is a restatement of the statute, has an impact on the payday loan industry. See id.

n64 18 U.S.C.S. § 1961 n.1 (1991).

n65 Id.

n66 Id. n.92.

n67 See Drysdale & Keest, supra note 10, at 642; Keest & Renuart, supra note 13, at 281.

n68 See Williams v. Walker-Thomas Furniture Co., 350 F.2d 445, 448-49 (D.C. Cir. 1965).

n69 See U.C.C. § 2-302 (1989).

n70 See id.; Hume v. United States, 132 U.S. 406 (1889); M.A. Mortenson Co. v. Timberline Software Corp., 998 P.2d 305 (Wash. 2000); Woodson v. Hopkins, 85 Miss. 171 (1904); Barker v. Altegra Credit Co., 251 B.R. 250 (E.D. Penn. 2000); Mallory v. Mortgage Am., Inc., 67 F. Supp. 2d 601 (S.D. W. Va. 1999).

n71 See supra note 70.

n72 2 Joseph M. Perillo & Helen Hadjiyannakis Bender, Corbin on Contracts, § 5.15 n.1 (1995) (quoting Harlan Fisk Stone, Book Review, 12 Colum. L. Rev. 756, 756 (1912)).

n73 Restatement (Second) Of Contracts § 208(c) (1981).

n74 See id. § 208(a).

n75 See id.

n76 See id. § 208.

n77 See id. § 208(c).

n78 See id. § 208 cmt. a.

n79 Id. § 208(b) (quoting Hume v. United States, 132 U.S. 406, 415 (1889)).

n80 See 17A Am. Jur. 2d Contracts § 295, at 294-97 (1991); 2 Perillo & Bender, supra note 72, at 74-80.

n81 See M.A Mortenson Co., v. Timberline Software Corp., 998 P.2d 305, 314 (Wash. 2000); Iowa Code Ann. § 537.5108 (West 1997). Some courts refuse to accept the concept of procedural and substantive unconscionability, choosing to instead look at both the reasonable expectations of the weaker party and any oppressive behavior demonstrated by the stronger party. These courts feel that the definition of "procedural unconscionability" is effectively identical to the definition of "adhesion contract," and they feel that this similarity renders every adhesion contract nearly unconcionable on a per se basis. Unwilling to make this sweeping condemnation, the courts have elected to disregard the concept of procedural and substantive unconscionability instead. See California Grower's Ass'n v. Bank of Am., 27 Cal. Rptr. 2d 396, 401 (Cal. Ct. App. 1994); see also 15 Walter H. E. Jaeger, Williston on Contracts § 1763A, at 213-15 (3d ed. 1972).

n82 M.A Mortenson Co., 998 P.2d at 315.

n83 See Wernly v. Anapol, 91 B.R. 702, 704 (Bankr. E.D. Pa. 1988).

n84 See Carboni v. Arrospide, 2 Cal. App. 4th 76, 81 (Cal. Ct. App. 1991).

n85 See Woodson v. Hopkins, 85 Miss. 171, 181 (1904).

n86 See Keest & Renuart, supra note 13, at 533.

n87 See A & M Produce Co. v. FMC Corp., 135 Cal. App. 3d 473, 487 (Cal. Ct. App. 1982).

n88 See id.; Keest & Renuart, supra note 13, at 533.

n89 See A & M Produce Co., 135 Cal. App. 3d at 487; Keest & Renuart, supra note 13, at 532.

n90 See A & M Produce Co., 135 Cal. App. 3d at 487.

n91 See Keest & Renuart, supra note 13, at 533; M.A Mortenson Co., v. Timberline Software Corp., 998 P.2d 305, 315 (Wash. 2000); Williams v. Walker-Thomas Furniture Co., 350 F.2d 445, 449 (D.C. Cir. 1965).

n92 Keest & Renuart, supra note 13, at 531-32.

n93 See Walker-Thomas Furniture, 350 F.2d at 449.

n94 Adhesion contracts are form contracts offered on a "'take it or leave it' basis." Broemmer v. Abortion Servs., 840 P.2d 1013, 1015-16 (Ariz. 1992). The stronger party in the transaction usually has considerable leverage, and the only way the weaker party can obtain the goods or services at issue is by agreeing to the terms of the contract. There usually is no negotiation involved with adhesion contracts. Furthermore, adhesion contracts often contain terms beneficial only to the stronger party. See id.

n95 See California Grower's Ass'n v. Bank of Am., 27 Cal. Rptr. 2d 396, 401 (Cal. Ct. App. 1994).

n96 See A & M Produce Co. v. FMC Corp., 135 Cal. App. 3d 473, 486-87 (Cal. Ct. App. 1982).

n97 See Keest & Renuart, supra note 13, at 42-43.

n98 See John P. Caskey, Fringe Banking: Check-Cashing Outlets, Pawnshops, and the Poor 13 (1994); Jarret C. Oeltjen, Florida Pawnbroking, An Industry in Transition, 23 Fla. St. U.L. Rev. 995, 996 (1996).

n99 See Oeltjen, supra note 98 at 1023-1024.

n100 See Caskey, supra note 98, at 12.

n101 See id.

n102 See Oeltjen, supra note 98, at 1023-24.

n103 See id. at 1024; id. at 1024 n.215 (discussing a Florida study of pawnbroker markups).

n104 Id. at 1023; Quick Cash, Inc. v. State Dep't of Agric. & Consumer Servs., 605 So. 2d 898, 902 (Fla. Dist. Ct. App. 1992).

n105 See Perez v. United States, 402 U.S. 146, 156-57 (U.S. 1971).

n106 See United States v. Pacione, 738 F.2d 567, 570 (2d Cir. 1984). Although payday lenders are not known for resorting to physical violence as a collection method, there have been a fair number of suits filed against payday lenders for extortionate collection practices. See Sharp v. Chartwell Fin. Servs. Ltd., 99 C 3828, 2000 U.S. Dist. LEXIS 3143, at *10 (N.D. Ill. Feb. 28, 2000) (harassing phone calls); Turner v. E-Z Check Cashing, Inc., 35 F. Supp. 2d 1042, 1051 (M.D. Tenn. 1999) (threatening to prosecute under the state's bad check statute when there was no authority for such prosecution); Boyce v. Attorney's Dispatch Serv., 99 C 3828, 1999 U.S. Dist. LEXIS 12970, at *5 (S.D. Ohio Apr. 27, 1999) (involving letters and phone calls threatening prosecution). Although extortionate collection practices of payday lenders is a substantial problem, this Article's focus on usury and unconscionability precludes an examination of these collection practices.

n107 See 114 Cong. Rec. 14,390 (1968).

n108 See id.

n109 See 113 Cong. Rec. 24,461 (1967).

n110 See 18 U.S.C. § 1961 (1994).

n111 See id. § 1961(6); see also Keest & Renuart, supra note 13, at 266. An "enterprise" is defined in RICO as "any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity." 18 U.S.C. § 1961(4).

n112 See Caskey, supra note 98, at 31-32.

n113 See Drysdale & Keest, supra note 10, at 619.

n114 See Lieberman Transcript, supra note 14, at 2 (Lieberman testimony); see also Consumer Federation of America, Comments of Consumers Union and Consumer Federation of America to the Finance Commission on Proposed Rules to Authorize Deferred Presentment Transactions (Mar. 31, 2000) <http://www.consumersunion.org/finance/comments700sw.htm>.

n115 See Drysdale & Keest, supra note 10, at 619.

n116 See id.

n117 See id.

n118 See Caskey, supra note 98, at 32.

n119 See supra note 37.

n120 See Caskey, supra note 98, at 32.

n121 See Martin Dyckman, Loan Sharks, Then and Now, St. Petersburg Times, Apr. 25, 1999, at 3D.

n122 See Keest & Renuart, supra note 13, at 265-66.

n123 See id.

n124 See Drysdale & Keest, supra note 10, at 600.

n125 Pendleton v. American Title Brokers, Inc., 754 F. Supp 860, 861 (S.D. Ala. 1991).

n126 See Keest & Renuart, supra note 13, at 265.

n127 See Pendleton, 754 F. Supp at 861.

n128 See id. at 864.

n129 See Floyd v. Title Exch. & Pawn, Inc., 620 So. 2d 576, 576-77 (Ala. 1993).

n130 See Glinton v. And R, Inc., 524 S.E.2d 481, 482-83 (Ga. 1999).

n131 See State v. Pawn America, No. 24632, 1998 WL 407101 (W. Va. July 17, 1998); Commonwealth v. Car Pawn, Inc., 37 Va. Cir. 412 (Va. Ct. App. 1995); Floyd v. Title Exch. & Pawn, Inc., 620 So. 2d 576 (Ala. 1993).

n132 See Keest & Renuart, supra note 13, at 269.

n133 See Association of Progressive Rental Organizations, What Is Rent-to-Own? (visited Dec. 4, 2000) <http://www.apro-rto.com/content/whatisrto.asp> [hereinafter What Is Rent-to-Own?].

n134 See Fogie v. Thorn Americas, Inc., 190 F.3d 889, 893 (8th Cir. 1999).

n135 See id.

n136 See Sight & Sound, Inc. v. Wright, 36 B.R. 885, 887-88 (Bankr. S.D. Ohio 1983).

n137 See Rent-A-Center, Inc. v. Hall, 510 N.W.2d 789, 792-93 (Wis. Ct. App. 1993).

n138 See id.

n139 See Keest & Renuart, supra note 13, at 268.

n140 See In re Stellman, 237 B.R. 759, 763 (Bankr. D. Idaho 1999).

n141 See Robert L. Jordan et al., Secured Transactions in Personal Property 362 n.4 (Foundation Press 2000).

n142 See What is Rent-to-Own?, supra note 133.

n143 See Association of Progressive Rental Organizations, Government Affairs (visited Feb. 28, 2001) <http://www.apro-rto.com/content/governmentaffairs.asp>.

n144 See Fogie v. Thorn Americas, Inc., 190 F.3d 889, 908 (8th Cir. 1999); Sight & Sound, Inc. v. Wright, 36 B.R. 885, 891 (Bankr. S.D. Ohio 1983).

n145 See Miller v. Colortyme, Inc., 518 N.W.2d 544, 550-51 (Minn. 1994).

n146 See Drysdale & Keest, supra note 10, at 619; Keest & Renuart, supra note 13, at 279.

n147 See John Hendren, Need a Few Bucks Just Til Payday?, Topeka Capital J., Mar. 21, 1999; Steve Jordon, Quick Cash, High Fees; More Are Using Loans to Make it to Next Payday- Payday Loan Services Offer Quick Cash at a Price, Omaha World- Herald, Apr. 9, 2000, at 1M.

n148 See Hendren, supra note 147; Jordon, supra note 147.

n149 See Show Me the Money, supra note 38, at 8.

n150 See id.

n151 See id.

n152 See id.

n153 See id.; Jordon, supra note 147, at 1M.

n154 See Keest & Renuart, supra note 13, at 279; see also Lieberman Transcript, supra note 14, at 21-22 (Pettijohn testimony).

n155 Keest & Renuart, supra note 13, at 279; see also Lieberman Transcript, supra note 14, at 21-22 (Pettijohn testimony).

n156 See Consumers Union, Disguised Payday Loans Mushroom in Texas, Victimizing Borrowers Who Face Exorbitant Interest Rates, Threat of Criminal Penalties (Feb. 25, 1999) <http://www.consumersunion.org/finance/paydaysw299.htm?payday+loa ns>.

n157 Id.; see also Drysdale & Keest, supra note 10, at 604 (describing ads and procedure).

n158 See Quick Cash, Inc. v. State Dep't of Agric. & Consumer Servs., 605 So. 2d 898, 902 (Fla. Dist. Ct. App. 1992). The defense raised by the payday lender in this case is identical to the defenses raised by salary-sellers at the beginning of the twentieth century. See Caskey, supra note 98, at 31-32.

n159 See Cashback Catalog Sales, Inc. v. Price, 102 F. Supp. 2d 1375, 1376 (S.D. Ga. 2000).

n160 See Lieberman Transcript, supra note 14, at 22 (Pettijohn testimony).

n161 See id. at 17 (Webster testimony). During the same forum the Payday Loan industry reported an average income of $ 35,000, although the Consumer Federation of America has determined the average salary to be $ 25,000. See id. at 46 (Lieberman testimony).

n162 See id.

n163 See Drysdale & Keest, supra note 10, at 633.

n164 Lieberman Transcript, supra note 14, at 18 (Webster testimony).

n165 See Check Cashing Headquarters, Check with Us F i r s t ( v i s i t e d S e p t . 1 6 , 2 0 0 0 ) <http://www.checkcashinghq.com/cc.htm>.

n166 See id. at 5.

n167 Gutierrez v. Devon Fin. Servs., Inc., No. 99 C 2647, 1999 U.S. Dist. LEXIS 19738, at *2 (N.D. Ill. Sept. 29, 1999).

n168 See Drysdale & Keest, supra note 10, at 629.

n169 Taylor v. Halsted Fin. Servs., L.L.C., No. 99 C 2466, 2000 U.S. Dist. LEXIS 384, at *32 (N.D. Ill. Jan. 14, 2000).

n170 See Allison Kaplan, Legislators Target 'Payday Loans' as Legal Loan Sharking, Chicago Daily Herald, May 5, 1999, at 8.

n171 See Lieberman Transcript, supra note 14, at 18 (Webster testimony).

n172 See Jean Ann Fox, The Growth of Legal Loan Sharking: A Report on the Payday Loan Industry (visited Feb. 22, 2001) <http://www.stateandlocal.org/loanshar.html>.

n173 See Lieberman Transcript, supra note 14, at 19 (Webster testimony).

n174 See MyPaydayLoan.com (visited Sept. 16, 2000) <http://www.mypaydayloan.com>.

n175 See Kaplan, supra note 170, at 8.

n176 See supra notes 173-75.

n177 See Keest & Renuart, supra note 13, at 279.

n178 See Lieberman Transcript, supra note 14, at 35 (Tarpey testimony).

n179 See Drysdale & Keest, supra note 10, at 633.

n180 See Keest & Renuart, supra note 13, at 280. The payday loan industry characterizes these statistics as evidence of "customer satisfaction." Drysdale & Keest, supra note 10, at 608-09.

n181 Drysdale & Keest, supra note 10, at 599.

n182 See Caskey, supra note 98, at 12.

n183 See id.

n184 See Keest & Renuart, supra note 13, at 266-67.

n185 See id.

n186 Id. at 268.

n187 See id.

n188 See Mitchem v. American Loan Co., No. 99 C 1868, 2000 U.S. Dist. LEXIS 5785, at *2 (N.D. Ill. Mar. 13, 2000).

n189 See Turner v. E-Z Check Cashing, Inc., 35 F. Supp. 2d 1042, 1046-47 (M.D. Tenn. 1999).

n190 See Fox, supra note 172; Lieberman Transcript, supra note 14, at 38-39.

n191 See 113 Cong. Rec. 24,461 (1967).

n192 See id.

n193 See Lieberman Transcript, supra note 14, at 35 (Tarpey testimony).

n194 See Keest & Renuart, supra note 13, at 279.

n195 Turner v. E-Z Check Cashing, Inc., 35 F. Supp. 2d 1042, 1045 (M.D. Tenn. 1999).

n196 See id.

n197 See id.

n198 See Hartke v. Illinois Payday Loans, Inc., No. 99- 3119, 1999 U.S. Dist. LEXIS 14937, at *6 (C.D. Ill. Sept. 13, 1999).

n199 Id; 12 C.F.R. § 226.2(a)(14) (2001).

n200 See Hamilton v. York, 987 F. Supp 953, 955-56 (E.D. Ky. 1997); E-Z Check Cashing, 35 F. Supp. 2d at 1048.

n201 See Hamilton, 987 F. Supp at 955-56 (quoting Hurt v. Crystal Ice & Cold Storage Co., 286 S.W.2d 1055, 1056-57 (Ky. 1926)).

n202 See id.

n203 See id. at 956; E-Z Check Cashing, 35 F. Supp. 2d at 1048; Miller v. HLT Check Exch., 215 B.R. 970, 974 (Bankr. E.D. Ky. 1997); Cashback Catalog Sales, Inc. v. Price, 102 F. Supp. 2d 1375, 1379 (S.D. Ga. 2000).

n204 See supra note 203.

n205 See supra note 203.

n206 See Quick Cash, Inc. v. State Dep't of Agric. & Consumer Servs., 605 So. 2d 898, 902 (Fla. Dist. Ct. App. 1992).

n207 See id.

n208 See id.

n209 See id.

n210 See Cashback Catalog Sales, Inc. v. Price, 102 F. Supp. 2d 1375, 1376 (S.D. Ga. 2000).

n211 See Consumers Union, Disguised Payday Loans Mushroom in Texas, Victimizing Borrowers Who Face Exorbitant Interest Rates, Threat of Criminal Penalties (Feb. 25, 1999) <http://www.consumersunion.org/finance/paydaysw299.htm?payday+loa ns>; Drysdale & Keest, supra note 10, at 604 (describing ads and procedure).

n212 See Keest & Renuart, supra note 13, at 279.

n213 See Hamilton v. York, 987 F. Supp 953, 955-56 (E.D. Ky. 1997) (quoting Hurt v. Crystal Ice & Cold Storage Co., 286 S.W.2d 1055, 1056-57 (Ky. 1926).

n214 See id.

n215 See 12 C.F.R. pt. 226, Supp. 1, § 226.2(9)(14)(2) (2001).

n216 See Jackson v. American Loan Co., 202 F.3d 911, 912 (7th Cir. 1999) (extension fee); Hartke v. Illinois Payday Loans, Inc., No. 99-3119, 1999 U.S. Dist. LEXIS 14937, at *6 (C.D. Ill. Sept. 13, 1999) (check cashing fee); Miller v. HLT Check Exch., 215 B.R. 970, 974 (Bankr. E.D. Ky. 1997) (service charges); Turner v. E-Z Check Cashing, Inc., 35 F. Supp. 2d 1042, 1046 (M.D. Tenn. 1999) (other charges).

n217 See Balderos v. City Chevrolet, 214 F.3d 849, 851- 52 (7th Cir. 2000); Miller, 215 B.R. at 974.

n218 See 15 U.S.C § 1605(a) (1994).

n219 See id. § 1605(b).

n220 See 12 C.F.R. § 226.4(a) (2001); Balderos, 214 F.3d at 851-52; Miller, 215 B.R. 970 at 974.

n221 See 12 C.F.R. § 226.4(a). The [APR] is the cost of consumer credit as a dollar amount. It includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit. It does not include any charge of a type payable in a comparable cash transaction.Id.; see also Balderos, 214 F.3d at 851-52; Miller, 215 B.R. at 974.

n222 See Drysdale & Keest, supra note 10, at 604.

n223 See 15 U.S.C § 1605(a) (1994).

n224 See Turner v. E-Z Check Cashing, Inc., 35 F. Supp. 2d 1042, 1046 n.4 (M.D. Tenn. 1999).

n225 Id.

n226 See id. at 1052.

n227 See id.

n228 See id. at 1051-52. The ruling in Turner is supported by the 7th Circuit, albeit in a somewhat indirect fashion, in Jackson v. American Loan Company, 202 F.3d 911 (7th Cir. 2000). In Jackson, the 7th Circuit held that TILA applies only to initial credit agreements and not to extensions. Since the court was dealing with a TILA claim related to a payday loan extension, it ruled that the extension fees were not interest relative to the initial loan agreement. However, the court inferred that extension fees would be correctly cast as interest charges in refinancing agreements. Jackson, 202 F.3d at 912-13.

n229 See Keest & Renuart, supra note 13, at 281; see also Show Me the Money, supra note 38, at 7. For example, some lenders falsely report to prospective borrowers that the fee is $ 15 per $ 100 borrowed. Most borrowers interpret this as meaning that for a $ 115 post-dated check a borrower will receive $ 100 cash, translating into a 15% fee. What the lenders mean, however, is that for a $ 100 post-dated check a borrower will receive $ 85 in cash, a fee of 17.65%. See Show Me the Money, supra note 38, at 7.

n230 See supra Part II.

n231 See Keest & Renuart, supra note 13, at 282.

n232 See id.

n233 See id.

n234 See Hearing Before the House Banking and Financial Services Comm., Subcomm. on Financial Institutions and Consumer Credit, 106th Cong. (1999) (prepared testimony of Jean Ann Fox, Director of Consumer Protection, Consumer Federation of America), a v a i l a b l e a t <http://www.house.gov/financialservices/51299fox.htm>; see also Show Me the Money, supra note 38, at 5. Eagle National Bank has partnered with payday lenders to make loans in Arizona and Virginia, which are both Type 1 states. See Show Me the Money, supra note 38, at 5.

n235 See Prepared Testimony of Jean Ann Fox [hereinafter Prepared Testimony of Jean Ann Fox], supra note 234.

n236 See Lieberman Transcript, supra note 14, at 27 (Rockford testimony); see also Keest & Renuart, supra note 13, at 282.

n237 Drysdale & Keest, supra note 10, at 647.

n238 Keest & Renuart, supra note 13, 282.

n239 See id.

n240 See id.

n241 See Lieberman Transcript, supra note 14, at 22 (Pettijohn testimony).

n242 See Consumer Federation of America, States Grant Payday Lenders a Safe Harbor from Usury Laws, at 3 (Sept. 7, 1999) <http://www.consumerfed.org/safeharpr.pdf>. Interest rate exportation in the context of payday loans has not yet been tested in a court of record. See Phanco v. Dollar Fin. Group, Case No. CV 99-1281 DDP (C.D. Cal. filed Feb. 8, 1999). Phanco was a multi-claim class action suit alleging, inter alia, that Eagle National Bank of Pennsylvania's affiliation with payday lenders resulted in a per se illegal application of interest rate exportation. Unfortunately, at least from the perspective of this Comment, the parties agreed to a settlement in November 2000, and the validity of this interest rate exportation configuration was never resolved. See id.

n243 See Keest & Renuart, supra note 13, at 279. This book states that one major payday loan company had bad debt charge-offs of only 2.6% in 1998, which compares favorably to the average charge-off rate of .14% in the check-cashing industry. See Caskey, supra note 98, at 113 (check-cashing average).

n244 See Lieberman Transcript, supra note 14, at 38 (Gallagly testimony); Show Me the Money, supra note 38, at 11.

n245 See Hartke v. Illinois Payday Loans, Inc., No. 99- 3119, 1999 U.S. Dist. LEXIS 14937, at *9-10 (C.D. Ill. Sept. 13, 1999); Pinkett v. Moolah Loan Co., No. 99C2700, 1999 U.S. Dist. LEXIS 17276, at *16-17 (N.D. Ill. Nov. 1, 1999). -

n246 See Lieberman Transcript, supra note 14, at 18-19 (Webster testimony); Drysdale & Keest, supra note 10, at 651.

n247 See Lieberman Transcript, supra note 14, at 18-19 (Webster testimony).

n248 See Drysdale & Keest, supra note 10, at 606 (comparing bounced checks to payday loans); Lieberman Transcript, supra note 14, at 18-19 (Webster testimony) (NSF fees of $ 50); Check Cashing Headquarters, Check with Us First ( v i s i t e d o n S e p t . 1 6 , 2 0 0 0 ) <http://www.checkcashinghq.com/cc.htm> (NSF fees of $ 43).

n249 See Drysdale & Keest, supra note 10, at 606.

n250 See Lieberman Transcript, supra note 14, at 18-19 (Webster testimony).

n251 See Keest & Renaurt, supra note 13, at 279.

n252 See Johnson v. Tele-Cash, Inc., 82 F. Supp. 2d 264, 278-79 (D. Del. 1999), rev'd on other grounds sub nom. Johnson v. West Suburban Bank, 225 F.3d 366 (3d Cir. 2000).

n253 See Drysdale & Keest, supra note 10, at 651 n.378.

n254 See id.

n255 See id.

n256 See id.

n257 See Lieberman Transcript, supra note 14, at 35 (Tarpey testimony).

n258 See Drysdale & Keest, supra note 10, at 651 n.378.

n259 See Keest & Renaurt, supra note 13, at 279; supra note 244.

n260 See Keest & Renaurt, supra note 13, at 279; supra note 244.

n261 See Lieberman Transcript, supra note 14, at 38 (Gallagly testimony); id. at 35-36 (Tarpey testimony).

n262 See Lieberman Transcript, supra note 14, at 38 (Gallagly testimony); id. at 35-36 (Tarpey testimony).

n263 See id.

n264 Drysdale & Keest, supra note 10, at 632-33.

n265 See id.

n266 See Lieberman Transcript, supra note 14, at 38 (Gallagly testimony).

n267 See Drysdale & Keest, supra note 10, at 632-33.

n268 See Lieberman Transcript, supra note 14, at 38 (Gallagly testimony); Show Me the Money, supra note 38, at 11.

n269 See Lieberman Transcript, supra note 14, at 17 (Webster testimony).

n270 See Turner v. E-Z Check Cashing, Inc., 35 F. Supp. 2d 1042 (M.D. Tenn. 1999).

n271 See Lieberman Transcript, supra note 14, at 35 (Tarpey testimony).

n272 Id. at 47 (Lieberman testimony); id. at 11-12 (Andersen testimony); Keest & Renaurt, supra note 13, at 280.

n273 See Lieberman Transcript, supra note 14, at 35-36 (Tarpey testimony) (describing how lenders want borrowers to continually renew loans).

n274 See id. at 15 (Fox testimony).

n275 See id.; Show Me the Money, supra note 38, at 10 (describing how more than 13,000 bad check charges were filed by payday lenders in a single precinct in Dallas County); Fox, supra note 172.

n276 See Keest & Renaurt, supra note 13, at 278-79; Lindsey, supra note 34 (describing how one payday lender sends a mobile loan unit into the rural areas of Pennsylvania).

n277 See Turner v. E-Z Check Cashing, Inc., 35 F. Supp. 2d 1042, 1051-52 (M.D. Tenn. 1999); Smith v. Check-N-Go, Inc., 200 F.3d 511, 514-15 (7th Cir. 1999).

n278 See supra note 277.

n279 See Keest & Renaurt, supra note 13, at 278-79; Show Me the Money, supra note 38, at 2-3; Lieberman Transcript, supra note 14, at 28 (Wilson testimony).

n280 See Keest & Renaurt, supra note 13, at 278-79; Show Me the Money, supra note 38, at 2-3; Lieberman Transcript, supra note 14, at 28 (Wilson testimony).

n281 See Smith v. Cash Store Mgmt., Inc., 195 F.3d 325, 333 (7th Cir. 1999) (Manion, J., dissenting).

n282 See Drysdale & Keest, supra note 10, at 630 (citing a low financial literacy among students).

n283 See Drysdale & Keest, supra note 10, at 631-32.

n284 See Pinkett v. Moolah Loan Co., No. 99C2700, 1999 U.S. Dist. LEXIS 17276, at *16-17 (N.D. Ill. Nov. 1, 1999). -

n285 See Hamilton v. York, 987 F. Supp 953, 955 (E.D. Ky. 1997).

n286 See Keest & Renaurt, supra note 13, at 280; Lieberman Transcript, supra note 14, at 28 (Wilson testimony).

n287 See Keest & Renaurt, supra note 13, at 280; Lieberman Transcript, supra note 14, at 28 (Wilson testimony). For example, any mortgage broker can explain how the mortgage industry determines the maximum home loan that a potential home buyer is eligible for by multiplying the potential home buyer's gross income by a standard percentage established by the industry.

n288 See Drysdale & Keest, supra note 10, at 664.

n289 See Hamilton, 987 F. Supp at 955.

n290 See Broemmer v. Abortion Servs., 840 P.2d 1013, 1015-16 (Ariz. 1992).

n291 See 12 C.F.R § 226.18 (2001).

n292 15 U.S.C § 1632(a) (1994).

n293 See Johnson v. Tele-Cash, Inc., 82 F. Supp. 2d 264, 277 (D. Del. 1999), rev'd on other grounds sub nom. Johnson v. West Suburban Bank, 225 F.3d 366 (3d Cir. 2000); Dixey v. Idaho First Nat'l Bank, 677 F.2d 749, 752 (9th Cir. 1982). When measuring conformance of a particular credit agreement to TILA, the courts use a "reasonable person" approach, looking to the content of the form and not to the perceptions of the individuals reading the form. See Smith v. Check-N-Go, Inc., 200 F.3d 511, 514-15 (7th Cir. 1999). This approach is based on the belief that, for example, some people are more sensitive to terms that are circled than they are to terms that are in boldface. See id. To make it easier for creditors to comply with these restrictions, the Federal Reserve Board created a sample consumer credit agreement for lenders to use as a guide. See Tele-Cash, 82 F. Supp. 2d at 277; 12 C.F.R. pt. 2, app. § H-2 (2001) (Loan Model Form).

n294 See Show Me the Money, supra note 38, at 6.

n295 See Van Jackson v. Check-N-Go, Inc., No. 99 C 7319, 2000 U.S. Dist. LEXIS 8352, at *15 (N.D. Ill. June 13, 2000); Smith v. Cash Store Mgmt., Inc., 195 F.3d 325, 328 (7th Cir. 1999); Mitchem v. American Loan Co., No. 99 C 1868, 2000 U.S. Dist. LEXIS 5785, at *2 (N.D. Ill. Mar. 13, 2000); Laws v. Payday Loan Corp., No. 98 C 5562, 1999 U.S. Dist. LEXIS 16225, at *3 (N.D. Ill. Sept. 30, 1999), aff'd sub nom. Brown v. Payday Check Advance, Inc., 202 F.3d 987 (7th Cir. 2000); Tele-Cash, 82 F. Supp. 2d at 273; Williams v. Walker-Thomas Furniture Co., 350 F.2d 445, 449-50 (D.C. Cir. 1965).

n296 Van Jackson, 2000 U.S. Dist. LEXIS 8352, at *15.

n297 See Cash Store Mgmt., 195 F.3d at 328.

n298 See Mitchem, 2000 U.S. Dist. LEXIS 5785, at *2.

n299 See Laws, 1999 U.S. Dist. LEXIS 16225, at *3 (interest rate and APR in same size font as other terms); Tele- Cash, 82 F. Supp. 2d at 273 (interest rate and APR in same size font as other terms).

n300 See Williams, 350 F.2d at 449-50.

n301 Lieberman Transcript, supra note 14, at 2 (Lieberman testimony).

n302 See id. at 3 (Lieberman testimony); Show Me the Money, supra note 38, at 3.

n303 See Keest & Renaurt, supra note 13, at 45.

n304 See id. at 282.

n305 See Show Me the Money, supra note 38, at 3.

n306 H.R. 1684, 106th Cong. (1999).

n307 See id.

n308 See id.

n309 See id.

n310 Id.; see also supra notes 154-60 and accompanying text for a discussion of some of the more clever recharacterizations of payday loans. Additionally, under H.R. 1684 § (6)(E), a lender can avoid regulation by claiming that it has no knowledge of the source of the cash used to repay a loan, or the lender can assert that the specific dollar bills used to repay the loan were not proceeds from another loan. H.R. 1684, 106th Cong. § (6)(E). Similarly, H.R. 1684 § (6)(F) lenders can set loans up with final due dates one year in the future with two-week "checkpoints," thereby avoiding "extension" regulations. Id. § (6)(F).

n311 See H.R. 3823, 106th Cong. (2000).

n312 See id.

n313 See id.

n314 See id.

n315 See id.

n316 See 12 U.S.C. § 1815(a)(1) (1994) (stating that any depository institution may become a member of the FDIC); id. § 1813(c)(1) (defining a depository institution as a bank or savings association); id. § 1813(a)(1)(A) (including National Bank in the definition of bank). These statutes provide that there is such a thing as a non-FDIC national bank. See id. §§ 1815(a)(1), 1813(c)(1), 1813(a)(1)(A); see also supra note 195 (citing a source that discusses how payday lenders have labeled their transactions as many different things, none of which include the word "loan").

n317 See 114 Cong. Rec. 14,391 (1968).

n318 See 15 U.S.C § 1605(a) (1994); Balderos v. City Chevrolet, 214 F.3d 849, 851-52 (7th Cir. 2000); Miller v. HLT Check Exch., 215 B.R. 970, 974 (E.D. Ky. 1997).

n319 See Hamilton v. York, 987 F. Supp 953, 955-56 (E.D. Ky. 1997) (quoting Hurt v. Crystal Ice & Cold Storage Co., 286 S.W.2d 1055, 1056-57 (Ky. 1926)).

n320 Keest & Renaurt, supra note 13, at 282. After imposition of federal APR safety-net legislation as proposed in this Comment, profits of payday lenders will probably decline and the industry may shrink or collapse. This result, if it occurs, will be neither good nor bad; it will merely reflect the impact of supply and demand economics on a short-term consumer credit offering that complies with traditional limits of usury and unconscionability. This Article has deliberately not considered the consequences of safety-net legislation on the payday loan industry, and it has also not attempted to identify or evaluate financing alternatives for people who currently rely on payday loans.

n321 This legislation would feature federal regulation through a high safety-net interest rate, but it would simultaneously embrace federalism by providing the states room underneath the safety net to establish their own interest rate policies and safeguards.

n322 See Keest & Renaurt, supra note 13, at 279.

n323 See Lieberman Transcript, supra note 14, at 21 (Webster testimony).

n324 See Drysdale & Keest, supra note 10, at 664.

n325 Keest & Renaurt, supra note 13, at 279; see also Lieberman Transcript, supra note 14, at 21-22 (Pettijohn testimony).

n326 Jackson v. American Loan Co., 202 F.3d 911, 912 (7th Cir. 1999) ("extension fee"); Hartke v. Illinois Payday Loans, Inc., No. 99-3119, 1999 U.S. Dist. LEXIS 14937, at *6 (C.D. Ill. Sept. 13, 1999) (check cashing fee); Miller v. HLT Check Exch., 215 B.R. 970, 974 (E.D. Ky. 1997) ("service charges"); Turner v. E-Z Check Cashing, Inc., 35 F. Supp. 2d 1042, 1046 (M.D. Tenn. 1999) ("other charges").

n327 See Keest & Renaurt, supra note 13, at 82.

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