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Labeling roll overs as new loans is common in the payday loan industry

Labeling roll overs as new loans is common in the payday loan industry

One of the criticisms aimed at the so-called payday loan business is that in requiring payment of the loan in full, without partial payments to reduce the principal, payday lenders trap consumers “in a vicious cycle of indebtedness.” Creola Johnson, Payday Loans: Shrewd Business or Predatory Lending? 87 Minn. L.Rev. 1, 4 (2002). Id. at 56. To roll over a loan is “to refinance a maturing obligation ? by offering a new obligation of the same type in exchange.” Webster’s Third New International Dictionary 1969 (1993).

Typically, payday loan customers are unable to pay off the entire indebtedness by the loan’s due date and have to “roll over” the loan

In Washington, WAC 208-630-085(2)(a) prohibits the classic form of roll over for chapter RCW small loans: “No loan made under this act shall be repaid by proceeds of another loan made under chapter RCW by the same lender or affiliate. The proceeds from any loan made under this act shall not be applied to any other loan from the same lender or affiliate.” 3 In an attempt to comply with this regulation, Cash Store requires its customers to “pay off” each loan with cash that is promptly returned to the customer when he or she pays the finance fee for the original loan, signs a new consumer loan agreement, and writes out a new postdated check. CP at 93. Johnson, supra, at 70. By paying back the loan and immediately taking out a new loan for the same amount, the consumer enters a debt treadmill, where the loan is nonamortizing and payment of a finance fee every two weeks is necessary to prevent a default. Id. at 59. The payday loan industry maintains that the risk of default is high and justifies exorbitant finance fees. However, “because the rollover practice is part of its business model, the risk of losing capital decreases over time.” Id. at 70-71.

Johnson alleged that Cash Store’s annual percentage rate of between 322 and 608 percent was usurious and an unfair practice for the purposes of the CPA