Although payday loans are marketed as a short-term solution for financial emergencies, they often land borrowers in a debt spiral. A new report from the Consumer Financial Protection Bureau (CFPB) found that about 50 percent of initial payday loans are the starting point for a series of 10 or more loans. The payday industry's business model depends on these repeat borrowers.
One North Carolina resident, Tonya Burke, turned to a payday lender owned by Nationwide Budget Finance for a $600 advance. Unable to repay with her next check, however, she began to fall behind, taking out more loans to cover the first, at annual interest rates of 300 percent to 500 percent. North Carolina made payday lending illegal in 2001, but some lenders were able to evade law by affiliating with out-of-state banks.
Carlene McNulty, a consumer rights lawyer at the North Carolina Justice Center, wanted to take legal action on behalf of Burke and thousands of other victims of payday lending, but the fine print on the loan contracts blocked recipients from participating in class-action suits. Many laws that allow such disclaimers try to promote arbitration; and at least 139 class-action lawsuits have been thrown out by courts, according to the nonprofit group Public Citizen. Because class-action lawsuits can lead to reform, McNulty challenged the bans and proceeded with five class-action cases, one against each of the five major lenders that still offered payday loans in North Carolina. Three lenders settled for $37.5 million by early 2011, and the North Carolina attorney general shut down the others.
The shift toward arbitration, even if it is more efficient and cheaper, suggests a change in the balance of power between companies and customers. Ordinary people with legal problems are finding it more difficult to get their complaints to court. "In a way it’s part of a class struggle," says New York University law professor Arthur R. Miller. "We are privatizing justice to the point the rich can afford it and every one else can’t."