Nevada’s highest court has ruled that payday lenders can’t sue borrowers who take out and default on secondary loans used to pay off the balance on an initial high-interest loan.
In a reversal from a state District Court decision, the Nevada Supreme Court ruled in a 6-1 opinion in December that high interest lenders can’t file civil lawsuits against borrowers who take out a second loan to pay off a defaulted initial, high-interest loan.
Advocates said the ruling is a win for low-income individuals and will help prevent them from getting trapped on the “debt treadmill,” where individuals take out additional loans to pay off an initial loan but are then trapped in a cycle of debt, which can often lead to lawsuits and eventually wage garnishment — a court mandated cut of wages going to interest or principal payments on a loan.
“This is a really good outcome for consumers,” said Tennille Pereira, a consumer litigation attorney with the Legal Aid Center of Southern Nevada. “It's one thing to be on the debt treadmill, it’s another thing to be on the garnishment treadmill.”
The court’s ruling focused on a specific area of Nevada’s laws around high-interest loans — which under a 2005 state law include any loans made above 40 percent interest and have a bevy of regulations on repayment and renewing loans.
State law typically requires high-interest loans to only extend for a maximum for 35 days, after which a defaulted loans kicks in a legal mechanism setting a repayment period with set limits on interest payments.
But one of the exemptions in the law allows for the borrower to take out another loan to satisfy the original amount owed, as long as it takes less than 150 days to repay it and is capped at an interest rate under 200 percent. But the law also required that the lender not “commence any civil action or process of alternative dispute resolution on a defaulted loan or any extension or repayment plan thereof” — which in other words means filing a civil suit over a defaulted loan.
George Burns, commissioner of the Nevada Financial Institutions Divisions — the state entity that regulates high-interest lenders and prevailing in state case — said that his office had received at least eight verified complaints over the practice of civil suits filed over defaulted payments on refinancing loans since 2015. Burns said that Dollar Loan Center, the respondent in the case, was one of four high-interest lenders making refinancing loans but was the only lender that argued in court that it should be able to sue over defaulted repayment loans.
“They’re going to be less likely to make a loan the consumer doesn’t have ability to repay, because they know now that they can’t sue,” he said. “They won’t be able to garnish the wages, so they’ve got to do a sound underwriting of loans.”
In the opinion, Supreme Court Justice James Hardesty wrote that Dollar Loan Center’s argument that the prohibition on civil lawsuits didn’t jibe with the expressed intent of the law, and that lenders gave up the right to sue borrowers on repayment plans.
“Such an interpretation would be contrary to the legislative purpose of the statute and would create absurd results as it would incentivize licensees to perpetuate the ‘debt treadmill’ by making additional loans under subsection 2 with a longer term and a much higher interest rate, which the licensee could ultimately enforce by civil action,” Hardesty wrote.
Dollar Loan Center, the respondent in the suit, didn’t return requests for comment. The company has 41 branches in Nevada.
Pereira said that civil action against borrowers repaying loans with another loan started after former Assemblyman Marcus Conklin requested and received an opinion from the Legislative Counsel Bureau in 2011 saying the restrictions in the law did not prohibit lenders from suing borrowers who defaulted on the repayment loans. She said that she had several clients come in facing suits from high-interest lenders following the district court’s decision in 2016, but had agreed with opposing counsel in those cases to delay court action until after the state supreme court made a ruling.
Burns said his office didn’t plan to engage in any additional enforcement or regulation on the types of loans in light of the court’s decision, and said he believed it was the final word on the matter.
“The Supreme Court ruling is the ultimate cease and desist,” he said. “It is basically telling not only Dollar Loan Center but also every other lender out there that might have been contemplating this that you can’t do this.”
Despite several ambitious attempts to curb high-interest lending during the 2017 legislative session, most of the bills attempting to modify state law around such loans were sunk either in committee or in the waning hours of the 120-day Legislature — including an emergency measure from Speaker Jason Frierson that would have required creation of a state payday loan database.
Lawmakers did approve a proposal by Democratic Assemblyman Edgar Flores that sought to tighten the rules on so-called “title loans,” or loans taken with the title of a vehicle owned by the borrower as collateral.
Payday lenders are a relatively powerful presence in the halls of the state Legislature — they contract with some of the state’s top lobbying firms as clients, and the industry gave more than $134,000 to state legislators during the 2016 campaign cycle.