By Elizabeth M. Boyle, Esquire
"Never borrow money needlessly, but if you must borrow call HFC. " I have often heard that unforgettable jingle https://www.youtube.com/watch?v=H76WGjEAKiw for Household Finance from the 1960s playing in my mind as I looked at the paperwork on hundreds of mortgage foreclosure cases for consumers since the Great Recession of 2008.
My father was a New York City CPA from the Lower East Side. He was a lifelong skeptic. He always warned his four little children whenever that HFC commercial came on TV to "never borrow money from those people, because you'll never be able to pay them back."
Today payday lenders thrive in the some of the poorest communities in our country, including those communities in rural Mississippi, Georgia and Alabama. In Mississippi, the poverty rate is 24%, about 1 in 4 of its residents. About 22 per cent of Mississippi households participated in SNAP, the federal Supplemental Nutrition Assistance Program. Among Mississippians over the age of 40, the "food insecurity" rate-- that is the percentage who are at risk of hunger--is nearly 30 per cent, the highest in the nation, according to a study by the AARP Public Policy Institute.
As a result of widespread predatory lending, thousands of godfearing hard working people are locked into loans they cannot afford. Locked into misery, anxiety, and shame. They don't know what will happen next and live in fear of the lender's escalation of collection efforts, hounding them and calling their employers and relatives, both near and distant. If a third party debt collector did these things, a consumer would be able to sue for actual and punitive damages and attorney's fees which would probably exceed the amount being collected. However, the Federal Fair Debt Collection Act exempts the owner of a debt from the requirement that they do not harass the borrower when trying to collect their debt. Many states have enacted laws to subject the owner of a debt to the same restrictions against harassment as a third party debt collector. Unfortunately, Mississippi is not one of those states, although Mississippi has criminal laws against stalking and harassment.
This question is: Why should a lender be able to lend money to someone who cannot afford the loan and then be able to harass that person and denigrate him or her for not being able to pay back the loan when the lender knew the borrower could not afford the loan in the first place? It is unfair, deceptive and destroys the fabric and productivity of society.
According to the U.S. Census for 2014, Laurel, Mississippi, has a population of 18,800. The average per capita annual income is $15,000 a year. Over 30 per cent of the people who live there are under the poverty guideline. There are 78 storefront and payday lenders listed in the 2015-2016 Laurel Yellowbook (what used to be known as"Yellowpages"). On the other hand, according to the list they keep on the service counter at the old Jones County Chancery Courthouse, there are fewer than 60 lawyers actively practicing law in Laurel. The aforementioned phone book has only one person's name listed as a Consumer Lawyer. The absence of adequate means to enforce the rule of law creates an atmosphere for a predatory lender to thrive without meaningful opposition.
The widowed mother of three girls called me for advice. The branch manager of the title loan company in her hometown had been calling her incessantly at home and at work threatening to come over to the house and put it on the market herself. We learned in discovery that the employees of the lender did in fact go over to my client's house several times while she was at work, unknown to my client.
The house in question was worth $200,000. It was a beautiful two story brick home in the gently rolling hills of Southern Mississippi. Tall stately pines in the front yard and perfect rows of fragrant boxwood lined the red brick walkway to the front door. The home was a lifetime dream for my client. She worked hard all her life. Never made big money. She spent her life savings to buy it. She wanted it for her family, for her three daughters and her grandchildren. And now the storefront lender was trying to take it away for a fraction of its value.
When I looked over the paperwork for the loan, it was worse than awful. The amount financed was $46,000.00. The interest rate was over 16%. The loan was usurious and the loan company had materially misled my client about the terms of the loan.
There was a five year pre-payment penalty. There were two loans in one. The first loan the title company talked her young daughter into putting up her car as collateral. Twenty days later they put a mortgage lien against her house. They collect their huge up front fees twice. And worse, there was a mandatory arbitration clause. Download Rural Payday Loan Company Arbitration Clause December 2011 . The clause said the consumer was giving up her right to go to court, giving up her right to a jury trial, giving up her right to appeal.
We paid the loan up to date, which was a few thousand dollars more than my client thought it should have been. I sent email and letters to the company. I set out what were several significant violations of the Truth in Lending Act. I sent a rescission letter for my client. See Jesinoski v. Countrywide Home Loans, 574 U. S. ____ (2015). http://www.foreclosuredefenseresourcecenter.com/2015/02/sample-letter-failure-honor-tila-rescission-letter/
At least the home would not be at risk of foreclosure if the mortgage was released, although the lender could still continue to wreck her credit and make her life miserable. According to the lender my client would have to pay them about $35,000 to pay off the loan today. She has already paid the lender over $25,000 in interest and fees alone, not including principal payments.
The President and CEO of the loan company answered me from Alabama. He said that there was nothing wrong with the closing paperwork because they never made any mistakes. He referred me to the company's legal counsel in Alabama, a Big Law firm.
The company's lawyer wrote back, maintained their argument that they made no mistakes in their paperwork. They would never release the mortgage! Also, if we were thinking about challenging the lender in court he gleefully informed me that there was a mandatory arbitration clause and that if we tried to file a lawsuit, they would come after us for their legal fees if they had to enforce the arbitration clause.
The clause required my client to go to one of two named arbitrators, either JAMS (Judicial Arbitration and Mediation Services, Inc.) or National Arbitration and Mediation. I looked both companies up on the Internet. Both had good websites with in depth explanations of the arbitration process. I was heartened to learn that JAMS had adopted a Consumer Arbitration Policy.http://www.jamsadr.com/consumer-arbitration/. This appears to have been related to legislation in the State of California to prevent mandatory arbitration clauses, upheld by the United Supreme Court as being okay and enforceable in consumer cases, from gutting consumer rights.
Arbitration is a very expensive process. It is really intended for commercial disputes between rich wealthy companies with money to burn on such things. This is not for working class consumers or elderly on a fixed income living paycheck to paycheck, whose access to justice hinges on whether they can find a lawyer to take their case on without being paid by them up front. There is no right to a free lawyer in civil matters.
Instead of using the local or federal court where the consumer would usually pay a one time filing fee of $500 or less, arbitration requires the parties to pay the arbitration management company and the appointed arbitrator up front hourly fees and management fees, which quickly rise into thousands of dollars within weeks as the matter progresses. Although there are many consumer attorneys who are willing to fight for a consumer on a contingency basis (consumer loses, attorney does not get paid) and willing to bear the financial risk of working hundreds of hours without being paid, I know of no consumer lawyers who could afford to advance arbitration costs and fees in an individual consumer case, in addition to the risk of not being paid for their own work and expenses.
It was hardly surprising to learn when I deposed the lender's CEO last month, that in the past 15 years since the lender started using this mandatory arbitration clause in its contracts that only two consumers of thousands (1000's) of consumers throughout the Deep South had ever made a demand for arbitration, one of them was my client from Mississippi and one was from Alabama. The Alabama case was settled before an arbitrator was even appointed. Other than those two, this payday lender has never been challenged by a consumer in the past 15 years.
It is well known that mandatory arbitration clauses in consumer contracts suppress and eliminate consumer's claims.
"The Supreme Court’s decision in AT&T Mobility v. Concepcion brings this claim suppression issue to the forefront, as that decision allows companies to use arbitration clauses to insulate themselves from exposure to plaintiffs’ class actions. A 2012 report by the advocacy group, Public Citizen, identified “76 potential class action cases where judges cited Concepcion and held that class action bans within arbitration clauses were enforceable.” There is substantial reason to believe that many more companies in the consumer setting, post-Concepcion, will use arbitration to prevent consumers from joining together in class actions either in arbitration or in litigation. Indeed, a recent empirical study by Professor Myriam Gilles of thirty-seven consumer clauses found that all of them contained class action waivers and that most of the clauses had been amended in the aftermath of Concepcion... By preventing consumers from joining together in class actions Concepcion has greatly reduced the likelihood that consumers can enforce certain of their legal rights in any forum." Source: "Mandatory Binding Arbitration Clauses Prevent Consumers from Presenting Procedurally Difficult Claims" by Jean R. Sternlight, Southwestern Law Review, Volume 42, 90, pages 88 - 129 (2012).
In May of this year (2015) Senator Al Franken and 57 other members of Congress signed a letter sent to Director Cordray urging the CFPB “to move forward quickly to use its authority under the Dodd-Frank Act to issue strong rules to prohibit the use of forced arbitration clauses in financial contracts and give consumers a meaningful choice after disputes arise.”
In March 2015, the CFPB delivered to Congress the final results of its empirical study of consumer arbitration as mandated by Section 1028 of the Dodd-Frank Act. The letter relies on what it calls a “substantial bedrock of evidence” in the study showing “the devastating effects of forced arbitration on tens of millions of consumers.”
The arbitration clause in my client's case said that her share of the fees would be $125.00. The JAMS' Consumer Arbitration policy on the portion of fees that the consumer would have to pay is $250.00. The JAMS policy states "the only fee required to be paid by the consumer is $250, which is appropriately equivalent to the current Court filing fees." The JAMS' policy also states "In California, the arbitration provision may not require the consumer to pay the fees and costs incurred by the opposing party if the consumer does not prevail."
What law applies to this Consumer Arbitration?
The Arbitration clause in my client's contract at paragraph 8 states "The arbitrator is required to follow all substantive law applicable to any dispute." Yet, paragraph 9 of the same contract says in bold font that the arbitrator's decision "CANNOT BE APPEALED." If the decision is not subject to review and appeal in the same manner and for the same reasons as any decision of a federal or state trial court judge is subject to appeal, then arbitration process is not consistent with the rule of law and manifestly unfair to the consumer, a complete crap shoot in the lender's own casino.
Making a complaint with the CFPB and FDIC.
I filed a complaint for my client with the Consumer Financial Protection Board (CFPB) in March of this year. The CFPB said it could not handle the investigation because mortgage origination and servicing were not within its jurisdiction. The CFPB forwarded the complaint to the FDIC. According to the FDIC website, the Director of the CFPB, Richard Cordray, also sits on the board of the FDIC.
The FDIC contacted the lender a large US BANK and gave the lender an opportunity to respond to the consumer's complaint. The FDIC "Consumer Response Center" did not contact me or my client during its "investigation." After considering the lender's response, the FDIC accepted the lender's arguments and sent a letter, simply signed by "Consumer Response Center" to close the case.
The FDIC letter, which we later learned was written by a non-lawyer without any formal legal training, significantly misstated aspects of the Truth in Lending law. It would have been different if the letter had clarified that the FDIC was not in a position to make the call on how the law should be applied, which is what it should say in those cases since the FDIC is not an adjudicative body.
I called the FDIC and spoke to the FDIC "Consumer Specialist" in Atlanta, who had handled the initial complaint. After that call, I filed a letter with the FDIC to request reconsideration and asked that the investigator--this time--contact the consumer as part of its investigation. The FDIC opened a new case and about a month later sent another letter closing the case, again making erroneous statements about the application of the law, again finding in favor of the lender.
During the FDIC's second "investigation," the FDIC again failed to contact the consumer. When I took the deposition of the President/CEO of the lender in Birmingham, Alabama, last month, I learned that the FDIC had also failed to contact the lender during its second "investigation."
After getting the second FDIC letter closing the case without an adequate investigation, I sent a complaint to the FDIC Office of Inspector General in Arlington, Virginia, requesting an investigation of the way the FDIC's Division of Depositor and Consumer Protection handles its investigations of consumer complaints against mortgage lenders.
The FDIC Office of Inspector General acted quickly on this complaint. Within two months there was a third letter from the Consumer Response Center in which the FDIC acknowledged the lender's errors in using the wrong Notice of Right to Cancel Form and slipping a 5 year prepayment penalty clause into a mortgage security agreement after the TILA disclosures had indicated that the loan would not be subject to any prepayment penalty. The FDIC requested the lender to perform a two year self audit, which resulted in the lender's discovery of another case in which it had improperly requested a consumer to pay an improper prepayment penalty. There are a few more issues that are still in dispute and the investigation is still pending. In discovery we found several emails from the lender in which they tried to collect the five-year prepayment penalty against my client, and have since shared those emails with the FDIC.
Starting the Consumer Arbitration process.
I Googled about consumer arbitrations generally. I had never handled an arbitration case, only litigation. I started practicing law in 1983, when ADR was first starting to take hold. Mediation soon became the norm, but consumer arbitration has never been the norm in the 30 years I have practiced law.
JAMS has a very helpful website. They have a fillable form online to provide the information necessary for a consumer to initiate a claim against a business. I filled out the form and printed it out. I sent it by online submission and I sent a check for $125.00 to JAMS with a hard copy of the documents, including the contract clause for mandatory arbitration. Download Consumer Initiates Case against lender to JAMS arbitration Sample
The parties received a letter from JAMS which explained the fee structure and how we would be given the names of three neutrals to chose from to hear the case. Download JAMS fee schedule and Disclosure Document for Arbitrator 2015. We received the names of three extraordinary lawyers/jurists and we were able to agree to one, he has been for decades a nationally renowned trial lawyer.
The parties agreed to the expedited process. In our case, the Arbitrator in fact did expedite the process. The case was opened in March, 2015 and by June, 2015 the Arbitrator has set a Final hearing date for September 23, 2015.
Next I filed an amended claim. According to JAMS rules and procedures, there is great leeway to add claims. http://www.jamsadr.com/rules-comprehensive-arbitration/ This could be of benefit to consumer especially when there is a continuing relationship with the lender during arbitration litigation.
The parties counsel followed the format for pleadings which is used in standard civil court litigation.We filed an amended claim/demand for arbitration. A sample of this claim is attached hereto with the names of the parties removed. Download Complaint to the JAMS Amended Complaint by JANE ELLEN DOE against RURAL PAYDAY LOAN COMPANY Mississippi for typepad blog A sample answer by the lender to the claim is attached hereto. Download Sample Lender Answer to Arbitration Claim and Defenses
The next step was a pretrial-discovery teleconference with the Arbitrator. Fortunately our Arbitrator was willing to allow us to communicate by email for all purposes during the litigation. At the hearing, discovery timelines were set and a hearing date was scheduled for September 23. The Arbitrator granted the plaintiff 3 depositions, two more than were usually allowed in the expedited procedure. The consumer is permitted under the rules to demand the hearing occur in her hometown. We asked for the hearing to occur in Laurel, Mississippi.
The Arbitration Fees so far...
The JAMS fees to date for this expedited Consumer Arbitration not including the Arbitrator's travel costs from Atlanta, Georgia, to Laurel, Mississippi, for the 8 hour arbitration hearing yet to be held have been $34,289.00 (comprised of $125 from consumer, $675 in case management fees, $6,500 for first 10 hours of Arbitrator's work, and $26,989 for management and additional fees), of which the consumer paid $125.00. Download Sample JAMS invoices Given the extremely complex and ever changing nature of Truth in Lending Law and Regulation Z, an arbitrator could easily expend 75 hours of legal time to study the variety of issues presented in this case.
What I learned about Storefront Lenders during discovery...
In our case, the lender used a software program called GOLDpoint. At first the defendant did not provide any of these records even though they were requested in discovery. After a motion for default based on defendant's discovery violation was filed, and after a deposition was conducted of its CEO/President, the defendant provided hundreds of pages of computer records which included company emails, and GOLDpoint records. The records included a "Collection Log" in which staff members recorded in great detail the contacts made with the consumer, including visits to the consumer's home. Also there was a "History Detail" about the payments and fees on account.
In our case the lender delayed discovery to such a degree that the hearing date was reset to November 12. JAMS sent the lender's attorney another invoice for additional services. The parties were to have conducted a deposition of the Laurel Branch Manager for the lender on September 23. However, the parties settled three days before the deposition.
Arbitration Costs are Unaffordable to Consumers even in a Consumer Arbitration
Over the seven month process, I spent an enormous amount of time "litigating" this arbitration claim-the parties used a format similar to the Federal Rules of Civil Procedure. This was not a "People's Court" and required the services of a trained litigator for each party. Had I not been serving the client pro bono there would have been no way she could have afforded to engage in this arbitration.