`Payday loans' ruled usury, therefore illegal

Tuesday, November 22, 2005
News staff writer
Payday lenders who lent money from 1998 to 2003 did so illegally because
they charged usurious interest rates, the Alabama Supreme Court has ruled.

The state's highest court, ruling on a 3-year-old appeal, said Friday that
payday loans made during that time frame were subject to restrictions of the
Alabama Small Loan Act.

Payday lenders - who front money to customers for a fee and a hold a
postdated personal check as security - have for many years said that the law
capping interest rates charged by lenders didn't apply to them.

Now, the court has toppled that argument. That raises the possibility that
customers who got loans from 1998 and 2003 might be able to sue for damages
stemming from the usurious interest.

"One question has been answered conclusively," said Mike Skotnicki, a lawyer
who has worked the case for years on behalf of consumers. "The Alabama
Supreme Court has ruled that these interest rates were usurious."

Skotnicki of Birmingham's Haskell Slaughter Young & Rediker law firm
represents customers suing various payday lenders in counties all over the
state. He said at least 10,000 loans, and as many as 50,000, were made
during the period. In one Birmingham business telephone directory, there are
advertisements for about 60 locations offering check cashing; most have
names that include the words "advance," "exchange," "loan" or "payday."

Subject to protections:

Payday lenders take personal checks from customers but don't cash them. In a
typical scenario, a customer writes a check for $120 and the lender pays out
$100. The customer can then redeem the check in a week or two by paying
$120. Or, customers can keep the $100 in play for as long as desired, paying
only $20 to keep the check from being cashed and the $120 being deducted
from their checking accounts.

Some customers roll their loans for months. That often translates into
annual interest rates of more than 100 percent.

In the industry, such agreements are called "deferred-presentment"
transactions. Friday, the court ruled conclusively on them in a 65-page

"The deferred-presentment transactions at issue are loans subject to the
protections of the Alabama Small Loan Act," the court wrote.

Attempts to reach the Alabama Check Cashers Association were unsuccessful
Monday. So were attempts to reach Rep. Mike Hill, R-Columbiana, a legislator
who has been vocal on the topic and supported a 2003 law that regulates the
payday industry separately from other financial businesses.

In April 2003, Hill successfully pushed the law that authorized the loans
and limited the interest to 17.5 percent per transaction, along with other

Now, the statute of limitations will be crucial in determining if customers
can sue for damages on loans taken out from 1998 through 2003. The statute
of limitations for civil injuries in Alabama is two years. Anyone who didn't
sue for damages before the law took effect in 2003 has no case.

But the courts still have to decide if the numerous legal appeals and court
motions filed concerning the matter delayed the two-year clock until
Friday's ruling.

Cases to pursue:

In any case, there are several cases in counties throughout the state that
were filed before 2003, but which were delayed pending the Friday ruling.
Those will now become active cases, Skotnicki said. He said class-action
lawsuits aren't out of the question.

"We will renew our attempts to collect on behalf of our clients, and perhaps
those similarly situated," Skotnicki said.

Skotnicki said he has clients who originally sought $400 from payday
lenders, borrowed from other payday lenders to pay the first loan, and wound
up forking over $2,000 in what he says amounted to interest payments. Other
clients had their cars repossessed or were incorrectly threatened with
prosecution for writing worthless checks, Skotnicki said.

He rejects the notion that lenders and borrowers should be free to make
whatever loan agreements they see fit.

"Certainly, we all enjoy the constitutional protection of freedom of
contract," he said. "But the state has decreed some contracts as unlawful or
immoral, and payday loan agreements are immoral on their face."

E-mail: rhubbard@bhamnews.com

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