April 27, 2009
Darren Craig

 

The Indiana Court of Appeals held in Payday Today, Inc. v. Defreeuw, that small consumer loans, known as payday loans, are subject to common law restrictions on interest rates, despite the legislature’s exempting those loans from certain statutory limits. 903 N.E.2d 1057 (Ind. Ct. App. 2009). Due to the procedural posture of the case, the court did not specify what those limits might be, but the tone of the opinion suggests lenders are likely to face greater judicial scrutiny of their loan terms.

Anne Defreeuw applied for a $200 loan from Payday, Inc., with a fourteen-day term and a $25.00 finance charge. Payday gave Defreeuw a Truth-in-Lending disclosure showing an annualized percentage rate of 325.89%. Defreeuw gave Payday a postdated check for $225.00. Defreeuw failed to pay off the loan in fourteen days, and, when Payday presented her check, Defreeuw’s bank returned it with a notation “closed account.”

Payday sued Defreeuw alleging fraud and breach of contract. The small claims court entered judgment in Payday’s favor on the fraud count, finding that Defreeuw had falsely asserted she had no other outstanding payday loans, and awarded treble damages, attorneys’ fees, and costs. The court, however, refused to enter judgment on the breach of contract claim, which sought interest of 325.89%, because it found Payday had brought that as an alternative theory and had not given Defreeuw fair notice that it intended to recover under both theories.

The court of appeals agreed with the small claims court’s disposition of the case, but chose to address the merits of Payday’s contract claim because “[t]he nature of this type of proceedings involving a loan to a destitute borrower makes it unlikely that a borrower will ever be able to participate in the appellate process.” The court then reviewed the history of usury law, including the passage of the Small Loans Act as an amendment to the Indiana Uniform Consumer Credit Code (“IUCCC”).

The Indiana Supreme Court held in 2001 that small payday loans are subject to the IUCCC’s limits on interest rates and Indiana’s loan sharking statute. Livingston v. Fast Cash USA, Inc., 753 N.E.2d 572, 575 (Ind. 2001). The IUCCC caps interest rates on loans of $300 or less at 36% per year, I.C. § 24-4.5-3-508(2)(a)(i), and the loan sharking statute makes it a criminal offense to charge an interest rate twice that provided in the IUCCC. I.C. § 35-45-7-2. The year after the supreme court decided Livingston, the Indiana General Assembly enacted the Small Loans Act, which imposed a number of restrictions on payday loans, but also exempted those loans from the interest rate provisions of the IUCCC and the loan sharking statute. I.C. § 24-4.5-7-411.

Despite those statutory exemptions, the court of appeals held that the legislature did not intend to exempt payday lenders from all limits on interest rates. The court offered a policy rationale for its decision that was influenced by current events in the credit markets: “Credit crises are, in large part, the results of poor borrowing choices, limited loan availability, and unconscionable interest charges. In view of these public policy considerations, we do not believe our legislature intended to free lenders to assess the unconscionable interest rates sought by Payday against Defreeuw.” That statement may signal that the court will take a more active role in regulating the terms of consumer loans.