Supreme Court Rules Against Payday Lender, Bans Grace Periods That Extend Loans, Increase Interest Payments
The Nevada Supreme Court has ruled in favor of the state agency overseeing high-interest, short-term “payday” loans in a case challenging the creative use of “grace periods” to extend loans. loans beyond the period required by law.
The notice, which was unanimously approved by the seven-member tribunal and released Thursday, says leading securities lender TitleMax violated state law by offering a new loan product “deadline. grace ”that has exceeded the 210-day limit required by state law. Although the company, which has more than 40 locations in Nevada, stopped offering this specific loan product in 2015, the state estimated that using the loans resulted in additional interest payments of $ 8 million. of dollars for over 15,000 people while it was in place. .
Nevada does not cap the interest rates that a lender can charge an individual on a loan, but any business that assesses 40% or more interest on a loan is subject to legal restrictions, including a maximum time to repay a loan and several protections if an individual cannot repay a loan on time.
The law also allows lenders to use “grace periods” to defer loan payments, as long as this is not conditional on charging a higher interest rate or taking out a loan. new loan.
“Grace Periods” were used by TitleMax to create a loan product called “Grace Period Extension Agreements”, an option for clients that essentially speeds up a grace period by sending the upfront interest payments on a loan. and additional payments on the principal amount. , extending them beyond the 210-day limit set by state law.
But the practice was challenged by the state’s financial institutions division, which discovered the use of the loans during its 2014 annual review of TitleMax. He pointed to examples of people being charged much higher interest than they would pay on a traditional loan; including an actual loan offered by the company of $ 5,800 at an interest rate of 133%.
Under the traditional loan structure, an individual would repay the loan in seven monthly installments of $ 1,230, but the “Deferral Agreement” allowed him to make lower monthly installments ($ 637 for seven months, then $ 828). $ for seven months) but ultimately nearly doubled the amount of interest paid to TitleMax ($ 4,462 to $ 2,813.16).
Despite the division’s order, the company refused to stop offering the loans, which led to a case before an administrative law judge who ruled in favor of the state and fined $ 307,000. to the society. TitleMax appealed to the district court, winning an overturn from Clark County District Court Judge Joe Hardy in 2017.
This led to an appeal to the State Supreme Court, which heard arguments in the case in March 2019. The order, drafted by Judge Lidia Stiglich, agreed with the state agency and found that extending loans through a grace period resulted in illegal collection of excess interest that had to be repaid in same time as the principal amount owed on a loan.
“This restriction on a 210-day title loan cannot be circumvented by providing a grace period that effectively recalculates payments over the original term of the loan so that they no longer proportionately and fully amortize the loan. all principal amount and interest payable on the loan, ”she wrote in the order. “To be sure, (state law) provides that interest may be charged during a grace period; it simply cannot be “additional”.
But the court also overturned the administrative fine imposed on TitleMax, declaring that the penalties against the company were not justified given the actions of the company and the “reasonable”, but incorrect, interpretation of the law. ‘Status on Grace Periods.
“While we find that the (deferral agreements) violated (state law), TitleMax’s actions following the 2014 inspection reveal revealingly that it was unsure whether it violated applicable laws and that it took active steps to determine whether the (deferral agreements) violated the legal regime, ”Stiglich wrote in the ordinance.
Efforts to impose restrictions on payday loans in Nevada have generally been rejected by the legislature, with bills to set interest rate caps and create other restrictions unsuccessful in the 2017 and 2019 legislative sessions. Lawmakers have made approve a bill in 2019 the creation of a statewide payday loan database, against strong industry opposition.
But the most recent restrictions on the payday loan industry have come from legal challenges. The State Supreme Court ruled at the end of 2017 that lenders cannot bring civil suits against people who contract and default on a secondary loan used to pay off the balance of an initial high interest loan.
The court also another more recent case involving TitleMax; a state appeal on “refinancing” restrictions on securities lending (prohibited for deferred deposits and other high interest loans, but not specifically for securities lending.)
According to Center for Responsible LendingNevadans pay on average the fifth highest interest rate on payday loans at around 652 percent. The state has 95 approved “high interest” lenders with more than 300 branches statewide; a check last year found that nearly a third of lenders had violated state laws or regulations in the past five years.