High-interest securities loans extended by ‘grace periods’ argued in Supreme Court
The Nevada Supreme Court will soon rule on whether high-interest payday lenders can use “grace periods” to extend the term of a loan beyond what is permitted by law. state law.
Court members on Monday heard arguments from lawyers questioning whether Titlemax, a high-interest securities lender with more than 40 locations in Nevada, should be punished or be allowed to continue making loans that span the beyond the state’s 210-day limit for high interest. loans through creative use of “grace periods”.
Although the company stopped offering the loans in 2015, Nevada’s Division of Financial Institutions – which oversees and regulates payday lenders – estimated that the loans resulted in approximately $8 million in additional interest attached to loans to more than 15,000 individuals.
Nevada law does not set a cap on the amount 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 lawincluding the maximum term of a loan and the guarantee that a customer can repay the loan.
The law also allows lenders to offer a “grace period”, to defer payments on the loan, as long as it is not granted on the condition of taking out a new loan or if the customer is charged a higher rate. to that described. in the existing loan agreement.
This provision has been used by Titlemax to create what are known as “grace period payment deferral agreements”, an option for customers to use a pre-loaded “grace period” where first payments are allocated to interest on a loan and additional payments—usually not allowed 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 quotes a real client who took out a $5,800 loan in 2015 at 133.7% interest 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 installments of $828.57 each. . This brought the total interest payment on the loan to $4,461, or $1,648 more than he would have had to pay under the original terms of the loan.
The lawsuit arose out of a regular review of Titlemax by the division in 2014, which highlighted the loans as violating state law by charging excess amounts of interest through the use of loans. with “grace period”. But the company refused to stop offering loans, saying the practice was technically legal under Nevada law.
The resulting standoff culminated 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 much of it is refundable if the company complied with the conditions.)
But the company appealed, winning a reversal from Clark County District Court Judge Joe Hardy in 2017, who ruled the loans were permitted under Nevada law. The case was later appealed by the state to the Supreme Court.
Solicitor General Heidi Stern, representing the state on Monday, said the district court’s decision to uphold the loans as authorized by state law violates the intent and plain language of the law. , urging judges to interpret the loan structure as one not offered “for free”. but rather as a way for Titlemax to make more money from loans.
“This court said laws with a protective purpose like this must be liberally construed to effect the benefits intended to be obtained,” she said. “If this is truly a protective law, it is intended to reduce consumer burden, not increase it.”
Daniel Polsenberg, a partner of Lewis Roca Rothgerber Christie, representing Titlemax, said legislative history has shown that the legislature changed the law from a total ban on charging interest during a grace period to an interest ban. “additional,” a change he says made the loan structure legal.
“The change in 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 loan recipients, noting that no borrowers had testified against the loans throughout the case.
“If we were really doing this just to make more money, we wouldn’t have done this,” he said. “We would charge a higher interest rate in all areas at the very beginning.”
Although Polsenberg said the company had done its best to comply with the law as interpreted, Stern said the company’s actions – including continuing to offer loans after being warned against it by the Financial Institutions Division – required a more severe sanction.
“A mere $50,000 fine is not enough to both punish TitleMax or change their behavior,” she said. “So, more importantly, what FID really wants here, which is to restore consumers and protect them from what happened to them as a result of Titlemax’s behavior.”