The Nevada Supreme Court will soon rule on whether high-interest “payday” lenders can use “grace periods” to extend the life of a loan beyond what’s allowed in state law.
Members of the court heard arguments on Monday from attorneys arguing whether Titlemax, a high-interest title lender with more than 40 locations in Nevada, should face punishment or be permitted to continue issuing loans that extend past 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, the Nevada Financial Institutions Division — which oversees and regulates payday lenders — estimated that the loans resulted in around $8 million in extra interest tacked onto loans to more than 15,000 individuals.
Nevada law doesn’t set a cap on how much a lender can charge an individual on a specific loan, but any lender that charges more than 40 percent interest on a loan is subject to rules and restrictions set in state law, including a maximum length of a loan and ensuring 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 isn’t granted on condition of taking out a new loan or if the customer is charged a rate in excess of the one described in the existing loan agreement.
That provision was used by Titlemax to create so-called “Grace Period Payment Deferment Agreements,” an option for customers to use a front-loaded “grace period” where the first payments go toward the interest on a loan, and additional payments — typically not allowed under state law — are made on the principal amount of the loan, extending it beyond the 210 day period.
The example used in briefings cites a real customer who in 2015 took out a $5,800 loan at a 133.7 percent interest rate over 210 days, with monthly payments of $1,230.45. But after entering into a “Grace Period Payments Deferment Agreement,” the customer’s loan period extended to 420 days, with seven payments of $637.42 and a subsequent seven installments of $828.57 each. That brought the total interest payment for the loan up to $4,461, or $1,648 more than he would have had to pay under the initial terms of the loan.
The legal action arose out of a regularly scheduled examination 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 “grace period” loans. But the company declined to stop offering loans, holding that the practice was technically legal under Nevada law.
The resulting standoff resulted in an administrative law hearing, where the division prevailed and Titlemax was ordered to cease offering the loans and pay a $307,000 fine (though much of it was reimbursable if the company complied with the terms.)
But the company appealed, winning a reversal from Clark County District Court Judge Joe Hardy in 2017 who ruled the loans were allowable 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 uphold the loans as permissible under state law flew in the face of the law’s intent and plain language, urging justices to interpret the loan structure as one not offered “gratuitously,” but rather as a way for Titlemax to make more money off of the loans.
“This court has said that statutes with a protective purpose like this one must be liberally construed to effectuate the benefits intended to be obtained,” she said. “If this is truly a protective statute, it’s meant to decrease consumer’s burden, not increase it.”
Daniel Polsenberg, a partner with Lewis Roca Rothgerber Christie, representing Titlemax, said legislative history showed that the Legislature amended the law from a total prohibition on charging interest during a grace period to a ban on “additional” interest, a change he said made the loan structure legal.
“The language change would make it clear that we’re allowed to charge interest, just 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 course of the case.
“If we were really doing this just to make more money, we wouldn’t have done that,” he said. “We would charge a higher interest rate across the board at the very beginning.”
Although Polsenberg said the company had done its best to comply with the law as interpreted, Stern said that the company’s actions — including continuing to offer the loans after being warned against it by the Financial Institutions Division — required a larger penalty.
“A simple fine of $50,000 is not sufficient both to punish TitleMax or to change their behavior,” she said. “As well as—more importantly—what the FID really wants here, which is to restore consumers and protect consumers from what happened to them as a result of Titlemax’s behavior.”