Are you prohibited from agreeing to pay as much interest as you can in order to get someone to lend you money? (Payday Loans & Unconscionability, 1)

I thought I would take a stab at a post-header that summarized the usual payday loan argument in a slightly-different, slightly-less consumer (un?)friendly way; whenever payday loans come up the focus is invariably on how terrible payday lenders are for doing what they do, kind of the same way that whenever football players hold out on their contracts the focus is entirely on how terrible the football players are to do what they do.

But football players can be cut at any time, and not get paid for the remainder of their contract (absent guarantees, of course.) So if owners don't have to honor the contracts, why do players, I sometimes ask people.

Now take that to payday lenders: Banks will not make micro-loans, especially not to people with marginal or bad credit, even if those people are employed. I've never run into a bank or credit union that would spot me $200 for a week or two, no matter how much interest I promised to pay them.

Payday lenders will, though -- they'll lend me $200 for a week or two, or longer, depending on the laws, and they'll charge a lot of interest to do that... relatively speaking.

Because a lot of interest needs to be quantified and considered rationally. Is it a lot when considered solely as a percentage of the loan? Or as a hypothetical figure that might never be paid? Or is it actually a lot?

Here's what I mean: If you consider only percentages, everything can look big. A 1,000% increase sounds huge -- but if you go from 1 to 10, that's 1,000%; so if I lend you a buck and you give me back eleven, I charged you 1,000% interest. But I only made ten bucks.

Is that a lot? Depends, right?

What about as a percentage? If I lend you ten bucks, and make you pay me back $15, I charged you fifty percent interest -- more than any credit card. But most people, I think, would say "Well, jeez, you only charged $5."

What about that hypothetical figure? Ever look at the amount of interest you'll pay on a mortgage loan? You should. If you take out a mortgage loan at 5% annually, on, say, $200,000, you'll pay, over the life of the loan, $186,511.57 in interest alone. You'll pay back $386,511.57, total, almost half of which is interest.

But everyone agrees that 5% is a reasonable rate, right? Suppose, instead of saying you'll pay 5% interest annually, the bank was required to tell you on your mortgage that forty-eight percent of what you'll pay is interest? That doesn't sound like such a good deal, now, does it?

I bring this up because it made big news that the Wisconsin Supreme Court is going to consider whether the interest rates charged by payday lenders can be deemed by a court to be unconscionable.

Details of the case are hard to come by. Here's what I found:

The court will consider whether state statutes block judges from determining if a particular interest rate is unconscionable and, if they don't, what evidence would prove rates are too high.

The case stems from loans Jesica Mount of Onalaska secured from Payday Loan Stores of Wisconsin Inc. in 2008. According to court documents, annual interest rates on the loans varied from 446 percent to 1,338 percent.

The loan company filed a lawsuit against Mount after she failed to make her payments. Mount filed a counterclaim alleging the loans violated the Wisconsin Consumer Act because the rates were unconscionable.

(source.) None of the stories I read told how much the loan was, or how long the woman had the loan out, or whether she made interest payments or provided any other detail. That would matter if you want to know not just what the annual interest rate might be, but also how to compare it to anything else to determine whether you think the rate is fair.

None of the stories, either, mentioned what I presume is the statute under which this case is currently being considered: Section 425.107, Wis. Stats., which reads:

425.107  Unconscionability.

(1) With respect to a consumer credit transaction, if the court as a matter of law finds that any aspect of the transaction, any conduct directed against the customer by a party to the transaction, or any result of the transaction is unconscionable, the court shall, in addition to the remedy and penalty authorized in sub. (5), either refuse to enforce the transaction against the customer, or so limit the application of any unconscionable aspect or conduct to avoid any unconscionable result.

(2) Specific practices forbidden by the administrator in rules promulgated pursuant to s. 426.108 shall be presumed to be unconscionable.

(3) Without limiting the scope of sub. (1), the court may consider, among other things, the following as pertinent to the issue of unconscionability:

(a) That the practice unfairly takes advantage of the lack of knowledge, ability, experience or capacity of customers;

(b) That those engaging in the practice know of the inability of customers to receive benefits properly anticipated from the goods or services involved;

(c) That there exists a gross disparity between the price of goods or services and their value as measured by the price at which similar goods or services are readily obtainable by other customers, or by other tests of true value;

(d) That the practice may enable merchants to take advantage of the inability of customers reasonably to protect their interests by reason of physical or mental infirmities, illiteracy or inability to understand the language of the agreement, ignorance or lack of education or similar factors;

(e) That the terms of the transaction require customers to waive legal rights;

(f) That the terms of the transaction require customers to unreasonably jeopardize money or property beyond the money or property immediately at issue in the transaction;

(g) That the natural effect of the practice would reasonably cause or aid in causing customers to misunderstand the true nature of the transaction or their rights and duties thereunder;

(h) That the writing purporting to evidence the obligation of the customer in the transaction contains terms or provisions or authorizes practices prohibited by law; and

(i) Definitions of unconscionability in statutes, regulations, rulings and decisions of legislative, administrative or judicial bodies.

(4) Any charge or practice expressly permitted by chs. 421 to 427 and 429 is not in itself unconscionable but even though a practice or charge is authorized by chs. 421 to 427 and 429, the totality of a creditor's conduct may show that such practice or charge is part of an unconscionable course of conduct.

(5) In addition to the protections afforded in sub. (1), the customer shall be entitled upon a finding of unconscionability to recover from the creditor or the person responsible for the unconscionable conduct a remedy and penalty in accordance with s. 425.303.

That's a mouthful; but the statute expressly allows a court to find "any aspect of the transaction" to be unconscionable, which makes the way the media are reporting this case to be somewhat suspect -- and worrisome, for consumer advocates:

The state Supreme Court has agreed to decide whether Wisconsin law permits judges to determine when payday loan interest rates are too high.

(Source.) That may just be reporters interpreting the case without bothering to check with lawyers. But maybe not. According to the case history at the appellate level, the panel certification that sent this to the Supreme Court of Wisconsin phrased the question as:

Whether the Wisconsin Consumer Act precludes a court from determining that an annual interest rate on a short-term loan of over a thousand percent is unconscionable should be decided by the Wisconsin Supreme Court. If the WCA does not preclude a court determining that interest rates are per se unconscionable, this case presents the question of what legal standard to apply in determining unconscionability and what evidence is necessary.

That's not the official text of any order; that's just what's publicly available online at the WCCA Appellate level records. But the order is troubling: Whether the Act precludes a court from doing that? How you phrase a question matters, and the Court of Appeals appears to be taking the stance that there's something in the Act that would bar the circuit court from doing what it did; the statute, though, speaks in terms of a court's broad powers, not in terms of proscriptions of the court's broad powers.

Also not noted in the stories, but I think relevant: The payday lender is the appellant, which means a circuit court already held that the rates were unconscionable -- presumably. I haven't seen the opinions. (I emailed two lawyers involved to ask them to share information with me, as it's cumbersome and expensive to get those records myself.) So getting the Court of Appeals to agree to phrase the question in a lender-friendly way may help even the field for a lender who (apparently?) lost round one; the question the Court of Appeals used reads almost exactly as I would have written that question if I were briefing this for the payday lender.

Also not noted in the stories: Justices Bradley and Prosser did not participate in at least some aspects of accepting this case for certification, again according to the records available online. That seems significant to me, but I can't say exactly why.

That's what I know about this case so far -- which is more than any other story on it has reported. I also know a lot about the law of unconscionability, both within the Wisconsin Consumer Act and without.

And while I'm already in the midst of a series of posts about parenting and emotional distress, who says I can't do two series of posts, right? So here's what I'm going to do: I'll wait and see what materials those lawyers provide me, but in the meantime, I'm going to do a series of posts on unconscionability as it affects payday lenders in other states, and as it has been used under the Wisconsin Consumer Act here in Wisconsin.

So check back and see what you learn about this issue -- and also consider this overriding question, which I'll phrase as a story problem:

Assume that courts can, as the law seems to say, determine that an interest rate is too high, as a matter of law. That determination is going to be made only after a consumer takes out a loan, and then decides to not pay that loan back -- either because he can't, or he won't. Once the decision to not pay the loan back is made, then either the lender or the consumer will go to court to get a ruling regarding that interest rate, resulting in the lender expending attorney's fees (which it cannot get back) and the consumer expending attorney's fees (which he can get back.) Ultimately, the Courts will make a determination on the interest rate -- upholding it, striking it entirely, or, the third-rail option, limiting the interest rates to the extent required to make the loan conscionable. (Go back and read that statute to see where the legislature gave the courts the power to do that.)

This, then, is the question: Is all of that good for consumers?

With follow up questions:

Do we want courts determining, after the fact, on a county-by-county basis, what interest rate is okay? Do we want the appellate courts to set a maximum interest rate across the State? Should the interest rate that is allowed be determined on a customer-by-customer basis? Should I, as a consumer protection lawyer, be allowed to agree to pay a higher interest rate than a high-school dropout who barely reads English?

Bonus question for you consumer advocates out there: Was this the best possible time to bring the Wisconsin Consumer Act to the attention of this Supreme Court and this legislature?