III. Conditions of Taking Out a Payday Loan

      The underclass is the payday lender's most profitable customer base, therefore, payday lenders market directly to members of the underclass even if the loans are unaffordable. Affluent and sophisticated consumers are less likely to make mistakes when shopping for loans because they are better educated about financial products or they can hire experts to help them. Additionally, to the extent they make a mistake, they have the financial ability to recover. By contrast, payday lenders design products that exploit poorer consumers' mistakes. Lenders advertise that payday loans are a fast and easy way to get a loan, especially for those with “bad” credit. The industry advertises via radio, television, internet, and mail. Moreover payday lenders will entice debtors to take loans by offering free and promotional payday loans to first time borrowers as well as referral fees to existing customers for referring new customers. The underclass “lack[[s] the financial cushion that rich consumers have, and therefore they are more vulnerable to the unexpected costs of credit products and more likely to stumble into financial distress.”

      Furthermore, payday lenders disproportionately target minorities especially African-Americans and Hispanics, along with military members and women. Payday lenders target minority communities by opening in poorer neighborhoods that are often comprised of a large number of minorities. The lenders even go so far as to develop business plans to promote the targeting of minorities and welfare recipients. It is well known that payday loans are “designed to extend credit to borrowers who are denied access to traditional credit products . . . [and] the broad exposure of minorities to payday loans and subprime mortgages implies a broad exposure to the risks associated with these products.”

      In further taking advantage of the borrower, payday lenders are fully aware that “many lower-income people are intimidated by banks.” Using this to their advantage, “friendly” payday lenders make customers feel at home and accepted so that they are comfortable taking out initial loans and then returning to borrow more. These practices suggest that lenders are wolves in sheep's clothing. When the debtor's loan rolls over, the borrower typically will end up paying $1800 for a $300 loan. Lenders know that borrowers will pay any interest rate for fear of not making other basic payments, such as for food or electricity.

      Payday lenders characterize a payday loan as a short-term loan, yet the loan is designed as interest-only so the “principal essentially stays out forever, while the lender recoups the money he has loaned in only four weeks.” This distinguishes payday loans from other types of loans, such as credit card loans or home mortgages, which are designed to pay off the principal and the interest in installments. The typical payday debtor finds it impossible to repay the principal balance by the end of the loan period. This leads to a “rollover”--which occurs “when a customer, unable to repay the full principal and unwilling to fall into default if the payday lender attempts to cash her check, rolls the payday loan over for another pay cycle . . . .” Rollovers are the “bread and butter” of the payday lending business.

      Payday loans are not necessarily related to a borrower's income. While a credit report is not required to take out a payday loan, the lenders do whatever they can to make sure they receive payments. The borrower is required to “enter into a bank debit agreement that enables the lender to debit the rollover fee from her bank account every two weeks.” Moreover, it is becoming increasingly popular to have a borrower authorize her employer to pay a lender directly from her wages. These wage assignments ensure that the payday lender will receive its payment before the borrower is able to pay other bills, creating a dependence on the payday lender to provide more loans, proliferating the borrower's cycle of debt.

      There is a great deal of direct and indirect coercion in payday lending. Discussing examples of such coercion, and even outright fraud, in predatory lending, Professor Kathleen C. Engel and Professor Patricia A. McCoy wrote, “[l]ending fraud comes in endless varieties and is only limited by the ingenuity of the perpetrators . . . . The first type of fraud consists of deception aimed at borrowers.”“The most notorious deceptions include fraudulent disclosures, failures to disclose information as required by law, bait-and-switch tactics, and loans made in collusion with home-repair scams.”

      Coercion exists within the methods by which payday lenders characterize the annual percentage rate (APR). The APR is advertised to the borrower as a fee for procuring the payday loan, but generally comes with additional features, trapping unwary consumers with inordinate fees. These “fees” are essentially a finance charge and when they are actually expressed as an APR it is clear that the percentage rate is astronomically higher. For example, a borrower who requests a $100 loan, writes a check for $115, and receives a cash advance of $100; the $15 fee on that loan translates to an APR of 390%. Depending on the transaction and the jurisdiction, the APR for a payday loan can reach even higher, and range up to 871%. The borrower will not realize that this fee is actually an APR because lenders do everything they can to make sure the borrower does not fully understand the implications of the fees. Payday lenders profit enormously from this type of deception through APR fees.

      Professor Michael A. Satz identifies further deceptive practices payday lenders employ to reel in borrowers. “Affinity marketing” schemes are used to mislead customers into thinking that the loans offered are government sanctioned. In addition, lenders encourage borrowers to “enter alternative lending transactions that are designed to skirt, or even break, the laws attempting to regulate the payday lending industry.”“These alternative lending practices include the sale-leaseback transaction, the cash-catalog sale and cash-back advertising.”

      Finally, debt collection options that traditional debt collectors may not use are available to payday lenders. Payday lenders will harass customers and their employers and relatives with vexing telephone calls, threaten violence against customers unable to repay, collect excessive damages from customers, and threaten criminal prosecution against customers who fail to make payments. Some criminal bad-check statutes enable a payday lender to coerce borrowers into paying their debts to avoid criminal prosecution. The analogy has been made that “payday lenders use the threat of jail just as a loan shark might have used the threat of physical violence.” Some of the lenders file criminal complaints in faraway jurisdictions, rendering it impossible for the borrower to respond to the suit. Payday lenders may place a hold on a debtor's checking account to enforce a payment. Complicated arbitration agreements are now emerging in payday loan contracts, and “payday loan companies rely on the in terrorem effect to dissuade consumers from bringing lawsuits.” Borrowers generally sign away any meaningful legal redress available to them when executing many payday lenders' agreements that include mandatory binding arbitration agreements.

      When it comes to receiving their money, payday lenders emerge like wolves, using coercive and frightening tactics to get their payments. As this discussion makes clear, payday lenders engage in various conduct at several stages--from marketing, issuing the loans, and collecting payment--that can be described as opportunistic or aggressive at best, and coercive and predatory at worst.