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Amy J. Schmitz

Excerpted from: Amy J. Schmitz, Females on the Fringe: Considering Gender in Payday Lending Policy, 89 Chicago-Kent Law Review 65 - 112, 148- 100 (2014) (327 Footnotes) (Full Article)

Amy J SchmitzThe law has done little to address contextual realities regarding payday loans, let alone data suggesting that these loans disproportionately burden women. General contract law seeks to limit intrusion on freedom of contract or consideration of context. Additionally, discrimination laws are largely ineffective in combatting more subtle discrimination via stereotyping that impacts payday lending practices. Furthermore, federal banking law limits the extent to which states can regulate payday loans, and state laws create conflicts and confusion because of states' varied approaches toward payday lenders. Moreover, it is very difficult for regulators to police online lenders and lenders affiliated with Native American tribes who benefit from sovereign immunity.

A. Legal Restraint in Regulating Lending

1. Classical Contract Assumptions

Classical contract law aims to preserve freedom of contract and ensure promise enforcement in a presumably competitive market. Furthermore, it is founded on objective theory, which presumes that purchasers, sellers, and decision-makers are rational actors with requisite information and bargaining power to make well-informed decisions. Classical law's theoretically neutral actors are somehow immune from perceptions and biases and, are therefore, blind to sexism, stereotypes, and behavioral propensities that defy what may appear objectively "rational" based on economic cost/benefit analyses. Classical law thus seeks to avoid interference with freedom of contract, even with respect to business-to-consumer, or "B2C" contracts, which businesses present to consumers on a take-it-or-leave-it basis. Most courts and legislators adhere to these classical notions.

Furthermore, economists who argue that the free market will promote efficiency have persuaded these courts and legislators. Law and economics theorists emphasize how strict enforcement of contracts and legislative restraint are necessary for optimal distribution of resources through market competition. They argue that legislative regulation of contract terms or other intrusions on freedom of contract increases costs for enterprises and harms consumers through higher prices and lower quality goods and services. Some scholars add that standardization of contracts benefits all consumers regardless of the contracts' adhesive nature because it lowers transaction costs and fosters production overall.

At the same time, many subscribe to the notion that consumers remain free to reject payday loans and bear responsibility for their failures to shop for or negotiate their loan contracts. Courts and commentators then downplay harm of discriminatory contractual behavior, and remain blind to context and subtle discrimination. "Free market" supporters propose that the market will cure any discriminatory contracting. They posit that sellers will remain blind to biases as they compete for customers, and this will eventually squeeze any discriminatory businesses out of the market. This again assumes that sellers and buyers are economically rational actors.

In reality, however, payday lenders seeking to maximize their profits have incentive to charge high fees and costs because the consumers purchasing these loans are desperate to obtain cash regardless of cost. They also usually lack the resources to "shop around," and thereby persuade lenders to compete for business and abide by fairness norms. Of course, courts should continue to primarily enforce voluntary agreements. However, courts should not overlook the importance of biases, stereotypes, societal norms, and behavioral propensities that may affect contracts in the real world. It remains true that the real world is marked with "messiness" that impacts all aspects of life--including contracting and debt.

2. Limited Regulation of Discriminatory Lending

The United States Constitution precludes state laws that discriminate against women and minorities, and constitutional equal protection constraints quash quotas or other state action that provides racial minorities or women with special rights. The Equal Credit Opportunity Act ("ECOA") prohibits creditors from discriminating against an applicant with respect to any aspect of a credit transaction on the basis of sex or marital status. Although the ECOA ostensibly does not apply to basic check cashing, it usually applies to payday loans offered by banks. It precludes these banks from offering substantially different interest rates or pricing structures for these products and aims to stop lenders from targeting or discouraging applications from protected groups. Specifically, lenders may not evaluate applications on a prohibited basis or discriminate against applicants because their income comes from a part-time job, alimony, child support, veterans' assistance, or other public assistance. Lenders must also notify applicants of adverse actions taken in connection with an application for credit in an accurate and timely manner.

Furthermore, Arkansas, California, Colorado, Connecticut, Georgia, Missouri, Nevada, New York, North Dakota, Ohio, and Oklahoma have state statutes prohibiting discrimination in consumer credit transactions on the basis of sex or marital status. California bars gender discrimination in credit contracts and letters of credit, as well as other documents. Kentucky has a general statute that prohibits gender discrimination in financial practices.

However, the ECOA and state discrimination laws are largely ineffective in addressing gender gaps in payday loan burdens because they generally target only clear disparate treatment and other overt and well-documented discrimination. For example, a plaintiff may survive a motion to dismiss where she proves that a creditor used gender-based epithets in threatening to increase a debt. However, even claimants who were disparately treated often face difficulty obtaining concrete evidence to prove their allegations. It is particularly difficult for claimants to overcome lenders' reliance on "discretionary pricing" as justification for more subtle discrimination. This is augmented by credit scoring to the extent that women and minorities may have lower scores due to the snowball effect from historical underrepresentation of these groups in the pool of past credit recipients.

Furthermore, disparate impact cases place a tough burden on claimants to: (1) establish that the defendant employed a specific policy or practice in order to discriminate and (2) demonstrate with statistical data that the policy or practice had a demonstrable adverse effect on the claimants. Borrowers have launched cases against lenders that improperly target racial minority communities in marketing overpriced loans, which is often referred to as "reverse redlining." However, these actions are difficult for plaintiffs and their attorneys to recognize or learn about because they do not easily have access to companies' internal documents or marketing strategies.

Moreover, it is an arduous uphill battle to prove that a payday lender is marketing to minorities, and even more so with respect to women. Lenders can easily explain away the statistics regarding minorities' or women's overrepresentation among payday loan borrowers. They may claim it is merely "coincidence" or simply due to consumers' purchasing choices.

Some have also argued that the disparate impact standard is not appropriate in these cases. With respect to Title VIII claims under the Fair Housing Act, for example, some refute disparate impact arguments because they do not require intent, and thus may punish well-meaning companies. Similarly, economist Paul Rubin stated:

It scares me because if this theory becomes widespread, if government looks intensely for disparate impact, looks for discrimination with no evidence of behavior, simply looks for cases where there are differences, then someone is going to put pressure on banks to relax their underwriting standards to make loans that they might not want to make in order to avoid being examined.

At the same time, general consumer lending protections like the Truth in Lending Act ("TILA") and the Real Estate Settlement Act ("RESPA") have been criticized for disproportionately burdening women by overloading consumers with disclosures. TILA requires lenders to disclose key information such as fees and interest rates, and Regulation Z implementing TILA mandates that disclosures be "clear and conspicuous." RESPA provides similar disclosure rules, which one commentator critiqued as further clouding women's borrowing decisions. Nonetheless, most commentators and policymakers support clear and understandable disclosures. Furthermore, some research suggests that women may pay more attention than men to disclosures in seeking to avoid risky behavior.

Concern for women's debt dilemmas has led some commentators to advocate direct gender consideration in financial reforms. For example, one commentator has proposed proactive regulations to account for women's disproportionate burdens from foreclosure, especially when they have families to support with no or low income. Nonetheless, outright regulation of financial markets must be tailored to address real hurdles women face in contracting. Instead, a better approach may be to augment financial education and invest in more serious consideration of gender as an important component of context when analyzing and enforcing loan contracts.

At the same time, anti-discrimination laws and policies promoting gender diversity must not cross constitutional lines by creating quotas or other special rights for any particular group. For example, Dodd-Frank requires each federal agency to create an Office of Minority and Women Inclusion ("OMWI") to promote "fair inclusion and utilization" of minorities and women in agency business. Furthermore, the CFPB is charged more generally with gathering data and creating regulations to address "abusive" tactics that financial service providers employ to take unreasonable advantage of consumers. Dodd-Frank also directs the CFPB to research "access to fair and affordable credit for traditionally underserved communities" as well as effective disclosures to address consumer propensities.

The government faces budgetary constraints and administrative concerns in creating education programs and lending initiatives. Government action requires allocation of limited public resources, and federal administration of programs within state boundaries is often plagued by inefficiencies and needless additional costs and confusion. Moreover, policymakers need more information through research regarding the existence and extent of gender discrimination and differences with respect to lending. There also are valid concerns about the design of any law or regulation that would address subtle gender biases and behavioral differences without reinforcing stereotypes. It would be counterproductive for the government to promulgate programs based on improper assumptions about women and men. Policymakers also should be careful to respect voluntary agreements.

B. Laws Targeting Payday Loans

The legal landscape covering payday loans is complex and confusing. To date, the federal government has enacted scant legislation covering these loans. However, Dodd-Frank now has opened the door to federal regulation by giving the CFPB power to study and regulate payday loans and other fringe lending products. The current lack of federal regulation has nonetheless left the law mainly to the states, which have adopted varied and incomplete regulations that leave loopholes for payday lender abuses. States also have had difficulty regulating payday lenders due to federal law's allowance for banks to charge their home state rates to all consumers nationwide. Internet lending and lenders' collaboration with sovereign tribes also have created difficulties for state regulators.

1. Limited Federal Restrictions and Proposals

As noted previously, the federal government has largely left regulation of payday loans to the states. The United States Supreme Court has interpreted the National Bank Act ("NBA") to allow national and state chartered banks and thrifts to "export" favorable laws from their home states in order to circumvent less-favorable laws in other states where they do business. This means that a bank chartered in Delaware may impose its interest rates on consumers in Colorado without worry about Colorado usury rate laws. Payday lenders use this to their advantage by affiliating with banks in states allowing for higher rates, and banks have started payday loan subsidiaries. Internet and out-of-state payday lenders seek to use the dormant commerce clause to challenge states' imposition of regulations on those who lend to their citizens. Nonetheless, some states have been successful in enforcing their laws on these lenders.

Online and other payday lenders also have partnered with tribes, thereby allowing those lenders to avoid enforcement of state payday lending laws by using tribal sovereign immunity. Critics of these tribal-affiliated payday lenders complain that the lenders charge usurious rates, while the lenders' defenders claim that these partnerships may provide much-needed economic benefits for the tribes. It is unclear, however, whether the tribes actually enjoy these benefits. Furthermore, tribal lenders have used questionable litigation tactics against state attorney generals who have tried to curb lenders' payday lending practices.

In Colorado, for example, tribal-affiliated lenders have stymied enforcement actions. In State ex rel. Suthers v. Cash Advance and Preferred Cash Loans, tribes associated with payday lenders secured dismissal based on sovereign immunity of the Colorado Attorney General's enforcement action against the lenders for violations of state usury laws. In dismissing the action, the district court applied the three-factor arm of the tribe' test that the Colorado Supreme Court established earlier in the litigation. This test focused on (1) whether the tribes created the entity pursuant to tribal law; (2) whether the tribe owns and operates the entity; and (3) whether the entity's immunity protects the policies of tribal sovereignty. The Attorney General argued that the lenders did not deserve protection because a single owner in Nevada was using the tribes for commercial purposes. The court rejected that argument, however, and emphasized that tribes are free to work with non-native persons to further economic development. Still, this litigation continues with respect to unresolved issues.

Some have thus proposed federal regulations in light of the complications for state lawmakers' attempts to regulate payday loans. These proposals have included a bill that would amend TILA so that no storefront or online payday lender may charge a rate of interest or a fee that exceeds 36%. The bill broadly defines "fees" and "interests rates" to include "payments compensating creditors for cash advance fees." It also gives individuals rights to sue lenders who violate the law, and to collect the greater of three times the amount of the total accrued debt associated with the violating transaction or $50,000. Violators also would be subject to criminal punishment, including one year in prison and a fine amounting to the greater of three times the amount of the total accrued debt associated with the transaction or $50,000.

This proposed amendment to TILA has not yet advanced in Congress, and it seems doubtful that it will become law. TILA already tackles a host of disclosure requirements and other consumer protections, which provided plenty of fuel for lawsuits in the housing credit crisis. These lawsuits reached their peak at 159 suits in the month of May 2009, after the housing market collapsed. These lawsuits have decreased significantly since that time. However, the CFPB is poised to issue regulations that may go as far as the proposed bill's strict rate cap for payday loans to all individuals or that could otherwise protect consumers from payday lenders' abusive practices. Moreover, the CFPB issued a White Paper on payday lending in spring 2013 and indicated its interest in taking regulatory action to protect consumers from getting caught in the cycle of high-cost payday loan debt.

Nonetheless, the federal government has gone further in protecting military members from perils of payday lending in the interests of national security. The Military Lending Act ("MLA") sets a strict 36% rate cap with respect to consumer loans, including payday loans, to regular or reserve active duty military and their dependents. The MLA also prohibits lenders from securing these loans with checks, electronic access to bank accounts, vehicle titles, or allotment of military pay.

The MLA also preserves individuals' access to the judicial system for asserting claims related to their payday loans. This precludes lenders from imposing arbitration clauses on individuals through payday loan contracts to prevent them from suing the lenders in court. Nonetheless, the MLA does not cover other forms of fringe lending, such as bank overdraft loans, unsecured installment loans, or rent-to-own transactions. Furthermore, the CFPB and FTC are not empowered to enforce the MLA and some high-cost lenders, most notably online lenders, have found ways to evade the MLA.

Reports indicate that the MLA has been largely successful in curbing predatory loans to active-duty service members and their dependents. The CFA reported a significant drop in payday loans to military persons five years after the MLA's enactment, as well as an overall 70% drop in payday lender storefronts in California after the MLA took effect. Nonetheless, some criticize the MLA for not covering inactive personnel, retirees, or veterans, thereby often leaving young service members returning from Iraq and Afghanistan susceptible to predatory lending. The CFA and others have, therefore, urged lawmakers to extend the MLA's coverage. Professor Creola Johnson argues that the MLA's 36% interest rate cap should protect all individuals in order to stop payday lenders from targeting their marketing at those most vulnerable to being caught in a debt trap resulting from confusion about payday loans' complex cost structures. Furthermore, she adds that a 36% cap would not freeze needed access to credit, as evidenced by banks' and credit unions' continued willingness to offer short-term loans to military members even after the MLA's enactment.

At the same time, Congressional representatives have proposed the Military Savings Act ("MSA") to extend the MLA by directing the Comptroller of the Currency to develop a pilot program aimed to decrease military members' need for payday loans by generating new financial products for service members and encouraging savings and wealth-creation. However, the bill does not provide specifics on these new financial products or how the Comptroller will accomplish the MSA's goals. It instead leaves flexibility, and allows the Undersecretary to expand or extend the pilot program if such actions would "decrease the need for service members and their families to rely on payday lenders without exacerbating credit overextension." The bill was last in the Subcommittee on Military Personnel.

As noted above, Dodd-Frank specifically authorizes the CFPB to study and promulgate regulations regarding payday loans, and the CFPB has made clear its interest in curbing payday loans and deposit advance products. Furthermore, the CFPB is empowered to monitor fringe lenders and investigate their practices. It also may restrict "unfair, deceptive, or abusive acts" that are "likely to cause substantial injury to consumers which [are] not reasonably avoidable by consumers" where this injury "is not outweighed by countervailing benefits to consumers or to competition." Dodd-Frank defines "abusive" to include a subjective dimension which allows for contextual considerations that may include gender. This opens the door to new protections and programs such as those discussed below.

Dodd-Frank allows for double-barrel federal/state regulation. The Act mandates that the CFPB must coordinate with states in regulating payday lenders, and preserves states' power to provide greater protections than those provided by federal law. This furthers federalism by allowing states to enforce their own consumer protection laws for the benefit of their citizens. Dodd-Frank also empowers states' attorney generals to enforce the Act's prohibitions and any rules the CFPB promulgates. A broad reading of Dodd-Frank also gives State Attorney Generals the power to investigate potential federal violations.

Dodd-Frank nonetheless limits federal regulation of payday loans by precluding the CFPB from establishing a federal usury prohibition. Furthermore, some have criticized Dodd-Frank as favoring large lenders over smaller businesses that cannot shoulder the costs of increased regulation. Some also note that the addition of federal regulations regarding payday and other non-bank lending may unnecessarily add to regulations that states currently impose on these lenders. In addition, groups have challenged the CFPB's constitutionality and the appointment of its Director, Richard Cordray.

At the same time, a group of Congressional Representatives introduced a bill to move regulation of payday loans from the CFPB to the Office of the Comptroller of Currency ("OCC"), and allow for newly chartered non-depository creditors ("Credit Corporations") to offer financial products and services such as payday loans. The bill would direct the OCC to charter these non-bank Credit Corporations to offer payday loans without worrying about likely CFPB regulations or adhering to states' separate payday loan regulations. However, many have resisted this bill, making it unlikely to succeed. Yet, it evidences the pushback the CFPB will encounter as it seeks to regulate payday lending.

2. Colorado's Measured Regulations

States struggle with regulating payday lending in light of federal law allowing banks to export their rates, and the jurisdictional complexities of regulating online lending and lenders affiliated with sovereign Native American tribes. Furthermore, the payday lending industry has wielded great power in state legislatures. That may explain why it has been reported that only eighteen states and the District of Colombia have been proactive in outlawing high-cost payday loans.

Colorado does not outlaw payday loans, but has been somewhat proactive in regulating these loans with an aim toward balancing consumers' and lenders' interests. Colorado's DDLA, noted above, sets a maximum loan amount at $500 and adds provisions aimed to hinder consumers from getting trapped in the usual payday loan roll-over cycle. DDLA thus limits consumers to one renewal or rollover of their payday loans, and requires a 30-day period between loans to the same consumer. Consumers may also cancel a payday loan transaction by 5:00 p.m. the next day. Furthermore, consumers may choose to repay loans in one sum or pay the full amount within six months.

DDLA also seeks to curb costs of payday loans. Accordingly, it caps the interest rate for these loans at 45%. However, that rate limit does not include fees and other costs, which add significantly to the effective APRs and true expenses that payday loan customers bear. Typical lenders collect interest, along with set-up fees, not exceeding 20% of the first $300 and up to 7.5% of amounts over $300. Lenders also may collect monthly maintenance fees of up to $30 after a loan remains unpaid for 30 days. Payday borrowers may recoup part of the fees if they pay back the debt early, and are not liable for additional set-up or maintenance fees if they renew or rollover the loan.

DDLA seems to have had some impact on the payday lending industry in Colorado. The dollar amounts of payday loans in Colorado have fallen almost 60%, and the number of loans fell from 1,110,224 loans in 2010 to 444,333 in 2011 after DDLA's enactment. The data also indicates that the enactment may have contributed to the drop in the average effective APR from 338.90% to 191.54%. In addition, the average number of payday loans consumers have taken out per year has fallen from 8.53 loans to 2.3 loans. As expected given the six-month repayment option, the average loan period has risen from 18 days to 188 days.

Nonetheless, the average contract finance charge has risen from $60 to $237. Furthermore, the average amount financed went up in 2011 to $373, which is higher than it had been in the previous ten years. There also has been an increase in "same-day-as-payoff" transactions, meaning the lender makes a new loan to a consumer on the same day the consumer pays their previous loan in full. This is effectively the same as a rollover or refinance for the consumer but allows the lender to bypass DDLA limitations on rollovers. However, the demographics of payday loan borrowers have remained roughly constant despite the changes in the law, and women still outpace men in payday borrowing in Colorado.

* * *

Policymakers would be wise to consider gender and other contextual factors in determining lending policy. Context matters. Empirical research *100 aids policymakers in crafting regulations to proactively perform their functions, instead of simply acting to "clean up" in a reactionary way. Furthermore, all exchanges, including loan contracts, have relational and social aspects that influence individuals' choices and behaviors. This Article thus invites policymakers to consider gender among the many contextual factors in creating policies and programs to address the perils of payday lending.

 Professor of Law, University of Colorado School of Law.