Thursday, June 05, 2008

consumer - payday lending - Consumer Discount Company Law - Loan Interest and Protection Law

Dept. of Banking v. NCAS of Delaware - Pa. Supreme Court - May 29, 2008

Stating that it is "well established that Commonwealth public policy prohibits usurious lending, a prohibition that has been recognized for well over 100 years, " the state supreme court affirmed the decision of the Commonwealth Court, 931 A.2d 771 (2007) in an action brought by the state Department of Banking to prevent the unlicensed defendant lenders from charging consumers fees that exceeded applicable state limits under the Consumer Discount Company Act, 7 P.S. §§6201-6219 (the “CDCA”), and the Loan Interest and Protection Law, 41 P.S. §§101-605 (the “LIPL”).

The court determined that Advance America, a payday lender, was subject to the licensing requirements of the CDCA, since the effective interest rate in its transactions -- more than 300% -- was much higher than the statutory limit of 6%.

Although the stated contract interest rate was 5.98% - just below the 6% limit prescribed by the CDCA - AA also charged consumers $149.95 per month as a "participation fee", which the court said was a charge under the statute that had to be include in the aggregate charges and thus was part of the interest rate determination, because the participation fee was a "necessary condition" of any credit advance by AA and was a "charge inextricably related to the amount actually loaned or advanced."

The court rejected the lender's argument that Delaware law should apply to the case by virtue of a choice-of-law provision in the contract with borrowers, stating that:

a) the case was brought by the state Dept. of Banking, not any individual borrower. The Department was not a party to or bound by the terms of any such contract. The "Department instituted this action pursuant to its police power, not only to protect consumers who had already entered into contracts with Appellant, but more broadly on behalf of the general public to enforce the policy protecting them from usurious lending....When viewed in this light,...the choice-of-law provision in Appellant’s contracts cannot bind the Department in this action to enforce Pennsylvania public policy."

b) even if the contractual provision applied, the Court "has recognized that choice-of-law agreements can be avoided when the terms offend Commonwealth public policy even in disputes between contracting parties....Pennsylvania courts have consistently held that the prohibition of exploitative lending is a fundamental public policy that cannot be circumvented."

c) Although some Pennsylvania statutes permit certain lenders to charge more than the statutory 6% rate under the Loan Interest and Protection Law, 41 P.S. sec. 101 et seq., "violation of any of these statutory provisions will itself offend the public policy of the Commonwealth, as established by the General Assembly."

The court held that its "interpretation harmonizes the remedial purposes of the statute by preventing lenders from charging 'extortionate' fees, while at the same time charging a legal interest rate, thus closing a wide loophole for usurious practices" and agreed with the argument of CLS, an amicus in the case, that this lending vehicle was "an example of the industry’s latest scheme to avoid usury laws....This Court has acknowledged that 'usury is generally accompanied by subterfuge and circumvention of one kind or another to present the color of legality.' ... We agree with the Department, and the amici that Appellant’s interpretation of the statute would undermine the usury laws’ purpose: 'to protect the citizenry of this Commonwealth from being exploited at the hands of unscrupulous individuals seeking to circumvent the law at the expense of unsuspecting borrowers who may have no other avenue to secure financial backing.'"