Supreme Court rules Nevada payday lenders can’t sue borrowers for second loan

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Nevada’s highest court has ruled that payday lenders cannot sue borrowers who contract and default on secondary loans used to pay off the balance of an original high-interest loan.

In a reversal of a state district court ruling, the Nevada Supreme Court ruled in a 6-1 opinion in December that high-interest lenders cannot bring civil suits against borrowers who take out a second loan to repay a first defaulting loan. loan at interest.

Lawyers said the ruling is a victory for low-income people and will help them avoid getting trapped on the “debt conveyor belt,” where individuals take out additional loans to pay off an initial loan, but are then trapped in a cycle of indebtedness, which can often lead to lawsuits and possibly wage garnishment – a court-ordered pay cut going to interest or principal payments on a loan.

“This is a very good result for consumers,” said Tennille Pereira, consumer lawyer at the Legal Aid Center of Southern Nevada. “It’s one thing to be on the debt treadmill, it’s another to be on the garnishment treadmill.”

The court ruling focused on a specific area of ​​Nevada’s high interest loan laws – which, under a 2005 state law, include all loans made above 40% d ‘interest and have a multitude of regulations on loan repayment and renewal.

State law generally requires that high interest loans only extend for a maximum term of 35 days, after which a delinquent loan triggers a legal mechanism setting a repayment period with limits set on the payments of the state. ‘interests.

But one of the exemptions in the law allows the borrower to take out another loan to meet the original amount owed, as long as it takes less than 150 days to pay it back and is capped at an interest rate. less than 200%. But the law also required that the lender “not take any civil action or alternative dispute resolution process on a delinquent loan or any plan to extend or repay it” – which in other words means bring a civil action for a delinquent loan.

George Burns, commissioner of the Nevada Financial Institutions Divisions – the state entity that regulates high interest lenders and prevails in state affairs – said his office had received at least eight verified complaints about the practice of prosecution civil claims filed for default on refinance loans. since 2015. Burns testified that Dollar Loan Center, the respondent in the case, was one of four high-interest lenders that provided refinancing loans, but was the only lender to argue before the court that he should be able to sue for overdue repayment loans.

“They will be less likely to give a loan that the consumer does not have the capacity to repay because they now know they cannot sue,” he said. “They won’t be able to garnish wages, so they have to make good loan underwriting.”

In the opinion, Supreme Court Justice James Hardesty wrote that Dollar Loan Center’s argument that the prohibition of civil suits did not meet the expressed intention of the law and that the lenders waived the right to sue borrowers over repayment plans.

“Such an interpretation would be contrary to the legislative purpose of the law and would create absurd results as it would induce licensees to perpetuate the ‘conveyor belt of debt’ by granting additional loans under paragraph 2 with a longer term. long and a much higher interest rate, which the dismissal could ultimately enforce through civil action, ”Hardesty wrote.

Dollar Loan Center, the respondent in the lawsuit, did not return the requests for comment. The company has 41 branches in Nevada.

Pereira said the civil action against borrowers repaying loans with another loan began after former Assembly member Marcus Conklin sought and received an opinion from the Office of Legislative Counsel in 2011 claiming that the restrictions on the law did not prohibit lenders from suing borrowers who defaulted on loans. She said she had appeared several clients in the face of lawsuits brought by high-interest lenders following the district court ruling in 2016, but had agreed with opposing attorney in those cases to delay legal action until the state Supreme Court has issued its decision.

Burns said his office had no plans to engage in further enforcement or regulation of loan types in light of the court ruling, and said he believed it was the final word on the matter.

“The Supreme Court ruling is the ultimate cease and desist,” he said. “That basically tells not only Dollar Loan Center but all the other lenders who might have considered this that you can’t do it.”

Despite several ambitious attempts to limit high-interest loans during the 2017 legislative session, most bills to change state law regarding these loans have been sunk either in committee or in the final hours. of the 120-day legislature – including an emergency measure by President Jason Frierson that would have required the creation of a state payday loan database.

Lawmakers approved a proposal by Democrat MP Edgar Flores to tighten the rules on so-called “title loans,” or loans made 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 main lobbying firms as customers, and the industry has given more than $ 134,000 to state legislators during the 2016 campaign cycle.

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