High Interest Securities Lending Extended by ‘Grace Periods’ Pleaded in Supreme Court
The Nevada Supreme Court will soon decide whether high interest “payday” lenders can use “grace periods” to extend the term of a loan beyond what is permitted by state law.
Members of the court heard arguments on Monday from lawyers arguing whether Titlemax, a high-interest securities lender with more than 40 locations in Nevada, should be punished or allowed to continue issuing loans in excess of the 210-day limit state for high interest. loans through creative use of ‘grace periods’.
Although the company stopped offering the loans in 2015, the Nevada Financial Institutions Division – which oversees and regulates payday lenders – estimated that the loans resulted in approximately $ 8 million in additional interest credited to over 15,000 people.
Nevada law does not set a cap on how much a lender can charge an individual on a specific loan, but any lender who charges more than 40% interest on a loan is subject to rules and restrictions set by state law, including a maximum term of a loan and ensuring that a customer can repay the loan.
The law also allows lenders to offer a “grace period”, to defer loan payments, until it is granted on the condition that they take out a new loan or if the customer is charged a rate higher than. the one described. in the existing loan agreement.
This provision was used by Titlemax to create “Grace Period Payment Deferral Agreements”, an option that allows clients to use a “grace period” at the start of the period where the first payments are used to pay interest. A loan and additional payments – usually not permitted by state law – are made on the principal amount of the loan, extending it beyond the 210-day period.
The example used in the briefings cites an actual client who took out a loan of $ 5,800 in 2015 at an interest rate of 133.7% over 210 days, with monthly payments of $ 1,230.45. But after entering into a “grace period payment deferral agreement,” the client’s loan period extended to 420 days, with seven payments of $ 637.42 and seven subsequent payments of $ 828.57 each. . This brought the total loan interest payment to $ 4,461, or $ 1,648 more than he should have paid under the original loan terms.
The lawsuit arose out of a regular review of Titlemax by the division in 2014, which pointed out that the loans violated state law by charging excess amounts of interest through the use of loans’ deadline. of grace ”. But the company refused to stop offering loans, saying the practice was technically legal under Nevada law.
The resulting stalemate resulted in an administrative law hearing, where the division prevailed and Titlemax was ordered to stop offering the loans and pay a fine of $ 307,000 (although a large portion be refundable if the company complies with the conditions.)
But the company appealed, winning an overturn from Clark County District Court Judge Joe Hardy in 2017, who ruled the loans qualified under Nevada law. The case was then appealed by the state to the Supreme Court.
Solicitor General Heidi Stern, representing the state on Monday, said the district court’s decision to maintain loans authorized under state law went against the intent and plain language of the law, urging judges to interpret the loan structure as not being offered “for free”, but rather as a way for Titlemax to make more money from the loans.
“This court has said that laws with a protective objective like this must be interpreted liberally to effect the benefits intended to be obtained,” she said. “If this is truly protective law, it is meant to ease the burden on the consumer, not increase it.”
Daniel Polsenberg, partner of Lewis Roca Rothgerber Christie, representing Titlemax, said legislative history has shown the legislature changed the law from a total ban on charging interest during a grace period to a ban on interest ” additional “, a change that he said has made the lending structure legal.
“The change of language would make it clear that we are allowed to charge interest, but not at a higher rate,” he said.
Polsenberg said the creation of the loan was an attempt to give “flexibility” to the loan recipients, noting that no borrower had testified against the loans throughout the case.
“If we had really done this just to make more money, we wouldn’t have done this,” he said. “At the very beginning, we were charging a higher interest rate across the board. “
Although Polsenberg said the company had done its best to comply with the law as interpreted, Stern said the company’s shares – including continuing to offer the loans after being notified by the financial institutions – required a greater sanction.
“A mere fine of $ 50,000 is not enough either to punish TitleMax or to change their behavior,” she said. “So, more importantly, what the FID really wants here is to restore consumers and protect consumers from what has happened to them as a result of Titlemax’s behavior.”