It May Be Legal, But That Doesn’t Make It Right: Developing A Case To Attack Title Loans

It May Be Legal, But That Doesn’t Make It Right:Developing A Case To Attack Title Loans

By:

Charles A. Prescott Jr.

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“If you take your neighbor’s cloak as a pledge, returnit by sunset, because that cloak is the only coveringyour neighbor has. What else can they sleep in?”- Exodus 22:26-27 (NIV).

This paper will examine potential state and federal attacks

on the title lending, and, by way of example, an attack on the

largest player in the market place - Titlemax. The relevant state

claims will be examined, potential strategies for attacking the

industry from both a private attorney prospective as well as the

actions potentially available to a state attorney general.

Special attention will be paid to the arbitration agreement and

the federal arbitration act. Potential attacks on the

arbitration agreement and the alternative actions that can be

taken within the arbitration framework will also be examined.

1) A Brief History of Debt and the Rise of the American Debt EconomyA) The Early History of Debt Regulation

The attempts to limit exploitive lending stretch back to the

dawn of civilization, with the earliest prohibition against usury

in the Vedic texts of India.1 The active limitation of usurious1Manu (Law Giver) Kullukabhatta, Institutes of Hindu Law: Or, The Ordinances of Menu, According to the Gloss of Cullúca 151 (Calcutta, Printed by order of the government, London, 1796). Available at https://play.google.com/books/reader?

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debt within that prohibition was by limiting the collections

strategies of the debt holder and the interest they could charge.

At the beginnings of the western tradition, The Code of Hammurabi

limited exploitive debt by limiting the collection against those

who were struck by the acts of the gods.2 The ancient Hebrew

texts, which form the direct basis of the western tradition,

limit the collection of interest against protected classes3 and

id=4caNTgBa6oEC&printsec=frontcover&output=reader&authuser=0&hl=en&pg=GBS.PA205 (“Interest on money received paid at the same time… must never be more than enough to double the debt that is more than the amount of the principal paid … and must not be morethan enough to make the debt quintuple… a Stipulated interest beyond the legal rate and different from the preceding rule is invalid and the wise call it an usurious way of lending… the lender is entitled at most to five in the hundred. Let no lender for a month or for two or three months at a certain interests receive such interest beyond the year nor any interest which is unapproved nor interest upon interest by previous agreement nor monthly interest exceeding in time the amount of the principal nor interest exacted from a debtor as the price of the risk when there is no public danger or distress nor immoderate profits froma pledge to be used by way of interest. He who cannot pay the debt at the fixed time and wishes to renew the contract may renewit in writing with the creditor's assent if he pay all the interest then due”)2 L. W. King, Hammurabi's Code of Laws, EXPLORING ANCIENT WORLD CULTURES (12/6/13 12:58 PM), http://eawc.evansville.edu/anthology/hammurabi.htm (stating that:“If anyone owe a debt for a loan… the harvest fail…in that year he need not give his creditor any grain, he… pays no rent for this year.”)3 Exodus 22:25 (NIV). “If you lend money to one of my people amongyou who is needy, do not treat it like a business deal; charge no

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limit actions taken in collection and the types of collateral.4

Under the reign of Julius Caesar interest rates were limited to

12% annually.5 The most active prohibitions of usurious debt

collections were in the medieval Catholic Church which applied

strict limits to the types of debt allowed and the ability to

charge interest rates.

B) The Common Law Tradition

Within the common law tradition the major break with the

dominant Catholic theology occurred in 1545 under the reign of

Henry VIII.6 The Common law consistently expanded the power of

interest.”4 Exodus 22:26-27 (NIV). “If you take your neighbor’s cloak as a pledge, return it by sunset, because that cloak is the only covering your neighbor has. What else can they sleep in? When they cry out to me, I will hear, for I am compassionate.” 5Martin A. Armstrong, Gaius Julius Caesar – 44BC (12/6/13 1:08 PM), Armstrong on Economics, http://armstrongeconomics.com/research/monetary-history-of-the-world/roman-empire/chronology_-by_-emperor/roman-republic-imperators/gaius-julius-caesar/6 An Act Against Usurie, 1545, 37 Hen. 8 (Eng.). (As a part of Henry VIII break with the Catholic Church, this rather deceptively named act allowed the collection of interest on loans by Christians, which the catholic church had prohibited, and eventually lead to the rise of Debtor’s Prisons.)

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creditors until the reforms of 1831 and 1861, culminating in the

Debtor’s Act of 1869 and the bankruptcy reforms of 1893.7

While the American Experiment breaks off from our common law

ancestors in 1776, when a group of free market capitalist broke

off from the Mercantilist system of the British empire, the

debtors experience in the American context remained largely

parallel to the British experience, in that by the Civil war the

debtors prisons were closed in America, at least for awhile. Our

Nation, has long held that economic rights are essential to the

very nature of freedom.8 The ability to form a contract was

viewed as such an essential right that it was included in our

constitution - “No State shall… pass any… Law impairing the

Obligation of Contracts.”9 However, every right has its limits,

and the freedom to contract finds its limits in the common law

7 4 Abolition of imprisonment for debt, with exceptions., UK ST 1869 c. 62 Pt I s. 4 ( Making it as a matter of law illegal to imprison people for failure to pay a debt.)( “With the exceptions herein-after mentioned, no person shall [...] be arrested or imprisoned for making default in payment of a sum of money.”)8 Of the twenty-seven complaints listed in the declaration of Independence, 8 or nearly one third, are specifically economic innature. Also see, the Lochner Era decisions of the Supreme Court.9 USCS Const. Art. I, § 10, Cl 1

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and the ability of the law to legislate what maybe contracted

for.

The American system of credit is largely a post World War II

invention, which with the rise of consumer credit and mortgages,

resulted in a rising availability of credit to borrowers of all

stripes at local banks, largely emerging in relation to the home

purchase market. The debt economy expanded into all sectors of

the economy from there. The modern debt economy is now

entrenched in academia, farming, basic purchasing, and almost

every other facet of American life. It is true that most credit

related transactions, while not particularly consumer friendly,

do not go into the territory of predatory lending, but there are

special breeds of modern lending that do.

C) The end of Consumer Protection and the Rise of the CorporateCourt

We now live in the time of decreasing consumer protections.

Our modern American financial system is fundamentally different

from the system that had previously existed. The 1978 Supreme

Court decision in Marquette Nat'l Bank v. First of Omaha Service Corp.

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interpreting National Bank Act10 in such a way that “that a

national bank may charge interest on any loan at the rate allowed

by the laws of the State in which the bank is located”11 gutted

state usury laws in relation to the national banks, after which

the flood gates of consumer credit were opened to the credit card

companies. The impact of this decision were immediate and

predictable- a race to the bottom for consumer protections,

Starting with Citibank offering to move to South Dakota – for the

low price of being able to write the laws that would govern their

business. As Gov. Bill Janklow, explained to a PBS interviewer -

“Citibank actually drafted the legislation,” and “we introduced

it, and it passed our legislature in one day.”12 Consumer

protections went downhill from there.

Along with the rise of anti-consumer credit arrangements

came the rise of Consumer Arbitration Clauses enforced under the

Federal Arbitration Act, a law designed to promote arbitration

amongst large corporate interest and shippers to prevent them10 12 USCS § 8511 Marquette Nat. Bank v. First of Omaha Svc. Corp., 439 U.S. 299, 308 (1978)12Frontline interview with Gov. William Janklow (SD) 8/4/2004, PUBLIC BROADCASTING SERVICE (12/6/13 1:11 PM), Available at http://www.pbs.org/wgbh/pages/frontline////////shows/credit/interviews/janklow.html

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from jamming the courts with every dispute. However, almost

every consumer transaction has now come under the auspices of the

federal law of arbitration. By the 1990’s the world opened for

the usage of the power of federal law, never written for, or

meant to be applied to consumer transactions, to destroy state

law based consumer protections. This law too came under the

contract clause and the power to regulate interstate commerce

under the commerce clause.13

The rise of the modern predatory lenders, which occurs, not

as an aberration against our founding philosophy, but instead is

the fulfillment of our founding free market ideology. These are

a set of grossly abusive loans in our market place that target

the poor – specifically the Title and Payday Lenders. The subject

of this paper, the automobile title loan, exists as an aberration

in our normal risk based consumer lending marketplace. There

are only 20 states that allow Title Loans.14 It is a lending13 Zabinski v. Bright Acres Assocs., 346 S.C. 580, 590 (S.C. 2001) (Because"involving commerce" means the "functional equivalent of 'affecting commerce,'" the FAA's reach includes the "full breadthof the Commerce Clause.")14 Car Title Lending by State, CENTER FOR RESPONSIBLE LENDING, October, 2012. (those states are Alabama, Arizona, California, Delaware, Georgia, Idaho, Illinois, Kansas, Louisiana, Mississippi, Missouri, Nevada, New Mexico, South Carolina, South Dakota,

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model built with the idea of likely default of the borrower. To

be clear, not a “risk” of default, but a near guarantee that the

borrower will default, defined as breaching the terms of the

loan, and an astronomical repossession rate of approximately

13%.15 In contrast, in the general automotive credit market the

repossession rate in august of 2013 was 0.36%.16 The Title loan

transaction has been explained in the Wall Street journal this

way - “The business works like this: A person in a financial jam

comes looking for a modest sum, say $500 or $1,000. The title

lender cuts a check for a one-month loan with interest typically

exceeding 20% -- upward of 260% on an annual-percentage-rate

basis. Title lenders usually won't lend more than about a third

of the car's value. The borrower turns over the car title as

Tennessee, Texas, Utah, Virginia, and Wisconsin.) Available at http://www.responsiblelending.org/other-consumer-loans/car-title-loans/tools-resources/car-title-lending-by-state.html15Adam Levitin, Auto Title Lending Data, CREDIT SLIPS (12/6/13 1:12 PM), (In which by examining the Tennessee Department of FinancialInstitutions reports found “13% of loans (18k/139k) or approximately one in seven” resulted “in a repossession.”) Available at http://www.creditslips.org/creditslips/2011/01/auto-title-lending-data.html16 U.S. auto repossession rate dropped to new lows in Q2, US AUTO NEWS, (12/6/13 1:15 PM), http://www.autonews.com/article/20130813/RETAIL02/130819983/u.s.-auto-repossession-rate-dropped-to-new-lows-in-q2#axzz2mYuj3JsI

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collateral. Sometimes the lender demands an extra set of car

keys, too, to make repossession easier.”17

The model described by the Wall Street Journal is actually

one of the earlier iterations of this lending product, more

accurately described as a title pawn. That model described is

still used in Georgia, Nevada, and a few other states.

For this paper we will examine contractual, tort, and

statutory attacks on title loans in two states. South Carolina as

an essentially unregulated marketplace, provides the clearest

base model for litigation. Virginia has been selected for its

highly regulated market place, and its slightly more progressive

legal system. These states were selected because they provides a

basic model of the statutory frameworks representative of the

rest of the countries regulatory frameworks.

2) Potential responses to Title Lending

There is a rising awareness of the danger that this type of

lending presents to consumers, and in recent years certain

17Joseph B. Cahill, License to Owe: Title-Loan Firms Offer Car Owners a Solution That Often Backfires, WALL STREET JOURNAL CLASSROOM EDITION (12/6/13 1:16 PM),http://info.wsj.com/classroom/archive/wsjce.99may.ymm.html

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classes of consumers have been specifically protected from

exposure to this dangerous lending model. The classical

protections of the bankruptcy process have long been available,

but the cost associated with seeking the bankruptcy process can

be perceived as prohibitive to low income consumers. While the

usage of Chapter 7 bankruptcy would result in the loss of the

collateral in the loan, Chapter 13 bankruptcy rules would allow

the modification of the loan, and the extension of payments up to

5 years, resulting in the reduction of payments to a potentially

manageable level.

A) Forward Looking Solutions

Within the new Consumer Financial Protection Bureau (CFPB)

there is the authority, the legislated purpose, and seemingly the

actual intent to regulate nonbank consumer financial

transactions.18 In fact, it has authority to declare unlawful18Dodd-Frank Act . §1024 (a)(1)(c)(the CFPB has the authority to regulate any entity that “the Bureau has reasonable cause to determine, by order, after notice to the covered person and a reasonable opportunity for such covered person to respond, based on complaints collected through the system under section 1013(b)(3) or information from other sources, that such covered person is engaging, or has engaged, in conduct that poses risks to consumers with regard to the offering or provision of consumer financial products or services”)

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any abusive consumer financial product or service, if the act or

practice:

“(2) takes unreasonable advantage of—(A) a lack of understanding on the part of the consumerof the material risks, costs, or conditions of theproduct or service;(B) the inability of the consumer to protect theinterests of the consumer in selecting or using aconsumer financial product or service; or(C) the reasonable reliance by the consumer on acovered person to act in the interests of theconsumer.”19

By any definition of the word, a loan that is 36 times more

likely than conventional auto finance to result in repossession

is surely abusive in that it fails to protect the interest of the

borrower in any real way.20 The CFPB has an expressed authority

to regulate Non-bank financial service providers, and an

expressed interest in regulating financial services in relation

to low-income consumers. However, this solution only provides

future consumers protection from this exploitive credit

arrangement while doing nothing to repair the condition of

existing or previous borrowers.21

19 Dodd-Frank Act. §1031 (d).20 This was calculated by dividing the title loan repossession rate into the general automotive repossession rate.21Nathalie Martin, Regulating Payday Loans: Why This Should Make the CFPB’S Short List, 2 Harv. Bus. L. Rev. Online 44 (2011),

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B) The Acknowledgement of the Threat - at Least to Certain Classes of People

Of special concern has been the exposure of soldiers and

sailors to these dangerous financial products. The military

views the financial stability of its soldiers as a national

security issue. Part of the process of gaining a security

clearance is a check of the finances of the applicant. It is

assumed that someone with substantial debt and limited income

presents a greater threat of violating the confidences they have

been entrusted with.

The title loan industry even in its infancy was subject to

some regulation since it was still subject to the Service Members

Civil Relief Act of 1940, which limits interest charged to an

active duty service member on debts that preexisted their entry

into the uniformed services to 6% annually.22 This limited

protection makes one of the few ways to modify the obligation the

act of entering into active duty military service.

However, these protections did not affect debts that come

into existence after the entry into the armed services. Which,http://www.hblr.org/?p=1595. (For a more in depth analysis of potential future CFPB actions see this article.)2250 USCS Appx § 527(a)(1)

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ironically, made young low ranking soldiers prime targets for

abusive credit practices. Once they had entered the military

there financial situation was relatively secure in that they had

regular income, but low ranking soldiers had low pay, and

generally are young without a substantial credit history. Title

and Payday Lenders preyed on this population regularly and made

it a point to locate their facilities near military bases. This

became such a persistent threat to military readiness that the

Department of Defense on August 9, 2006 issued the “Report On

Predatory Lending Practices Directed at Members of the Armed

Forces and Their Dependents” to congress. 23It in the DOD

described Title Lending as financial product that “undermines

military readiness, harms the morale of troops and their

families, and adds to the cost of fielding an all volunteer

fighting force.”24 The Report and its findings lead Congress,

with the encouragement of the Department of Defense, into writing

law protections for service members from these products.

23Report On Predatory Lending Practices Directed at Members of the Armed Forces and Their Dependents, DEPARTMENT OF DEFENSE (12/6/13 1:19 PM), Available at http://www.defense.gov/pubs/pdfs/Report_to_Congress_final.pdf24 Id. at 53.

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Congress created these protections through the Military Lending

Act, a modification of the John Warner Defense Authorization Act of 2007.

This put Congress on record as acknowledging these products are

dangerous, and that record could provide a basis for future

legislative action. The DOD report, in addition to spurring

congressional action, is an acknowledgement by the federal

government that these products are dangerous to consumers, and,

given the extensive documentation within the report could provide

an adequate research basis for the CFPB to act quickly in

controlling future consumer losses in relation to predatory title

lending.

3) Angles of Attack – Private Litigation, Arbitration, or Public Litigation

There are multiple lines of attack within the sphere of the

courts or the approximations thereof. Public litigation to

control the industry would be the most powerful attack because

the relevant State or federal Attorney General would not be bound

by the terms of the contract and would have substantial

litigation capacity. A private attorney could pursue action in

the courts but may be forced into the arbitration system. The

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actions and strategies available to a government actor are

outside the scope of this paper, and should be researched

separately if that course of action is available within the

relevant jurisdiction.

A) The Attorney General

While it exceeds the scope of this paper, a state Attorney

General could pursue litigation against the title lender, on

behalf of the borrowers, due to a right reserved to them to

pursue the federal statutory claims against the Title Lenders.

That litigation can not be subjected to the arbitration clause,

because the state was never a party to the contract, and an

action by the state is a law enforcement action.

B) The Private Action

This focus of this paper, Private litigation, has

substantial possible rewards for an enterprising attorney.

However, there is the possibility that claims cannot be pursued

in open court, and instead would be limited to Arbitration

forums, with their tendency to be pro industry. It is almost

assured that this Litigation will be sent into the arbitration

forum for adjudication of claims. This problem is not

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necessarily fatal, but it might require a long series of repeated

arbitration proceedings. Additionally, arbitration can be

problematic for a novel legal theory and has the disadvantage of

not having precedential authority. However, it cannot be said

that Arbitration is an unwinnable forum, since victory is

possible with an effective argument.

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4) Litigation – A possible Solution to an Intractable Problem.

While there is some hope that the CFPB or Congress may take

action to eliminate, or at a minimum, restrict predatory lending

it is unlikely that they will be able to do so in the immediate

future. Therefore, an alternative strategy to control the spread

and usage of a dangerous financial product should be pursue –

litigation. In order to bring suit there must be a defendant, a

plaintiff with standing, and law to under which a claim can be

brought. For the purposes of this paper an action against

Titlemax, one of the largest corporations involved in this

lending model will be examined. It is the chosen litigation

target, not because they will be the easiest to successfully sue,

but because it is representative of the industry as a whole. It

is likely that any claim that could successfully be brought

against it would be successful against any of the smaller

industry players.

A) Picking the Target

The company selected as our example for litigation is TMX

Holdings LLC, a Delaware Limited Liability Corporation

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headquartered in Georgia. TMX has 1200 independent locations in

14 states under 3 separate brands. It also has subsidiaries

named TitleMax Aviation, Inc. ("Aviation") and TitleMax

Construction, LLC, a corporation that performs construction

services for TMX Holdings exclusively. They have $470 million in

assets and $329 million in liabilities. For a net straight cash

valuation of ~$140 million, excluding other assets. Furthermore,

it is the specific target of litigation because of the admission

that they have no underwriting standard as “they offer title

loans in amounts ranging from $100 to $5,000…” and “do not run

credit checks on… TitleMax and TitleBucks customers, and… do not

make negative credit reports if… (they) are unable to collect

loan balances.”25 Furthermore, as the largest player in the

industry it has $90 million cash on hand as of Dec. 31, 2012 and

had a profit of $43 million in Q1 2013.26 The specific

litigation would be filed against Titlemax of South Carolina or

Titlemax of Virginia, both wholly owned subsidiaries of TMX25Elizabeth C. Nelson, Chief Accounting Officer, TMX Financial Form SEC 10Q filing, Commission File Number 333-172244, SECURITIES AND EXCHANGE COMMISSION (May 14, 2013), Available at http://www.sec.gov/Archives/edgar/data/1511967/000110465913041451/a13-8662_110q.htm26Id.

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Holdings, and the holding company should also be named under the

permissive joinder rules.

B) Finding the Plaintiff

Locating plaintiffs should be relatively unproblematic.

Repossessions are required to registered with the Department of

Motor Vehicles in both South Carolina and Virginia. Additionally,

there may required filings within the court depending on the

circumstances surrounding the repossession. Those public records

will provide the names, addresses and other relevant information

to locate potential clients to bring suit against a title lender.

Under almost any given state standard of professional

conduct sending a letter to inform a potential client of the

availability of legal services is not a violation of the rules of

professional conduct.27 Additionally, since these loans are made

to, and in low income areas, advertising space is relatively

cheap since advertising to those areas is not considered “prime”

advertising space. For example, a billboard in a low-income area

can cost as little as $300 per month. Those rates would allow

27See, Rule 7.3, RPC, Rule 407, SCACR (2005).; Cf. Va. Sup. Ct. R. pt. 6, sec. II, 7.3 (2005)

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broad exposure to the target demographics at a relatively low

price per contact of the target demographics. Furthermore, since

the industry locates its retail locations in the same places as

its prospective customers one could use the location of industry

locations as a guidepost for the location of the targeted

advertising. Finding the Client is the easy part. Getting paid

may be more of a challenge.

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C) Potential Claims

The attack on these loans has multiple potential statutory

claims on the state and federal level, as well as common law and

traditional tort claims that can be asserted. The federal Claims

can include the Equal Credit Opportunity Act (ECOA)28, the

Racketeer Influenced and Corrupt Organization (RICO) Act,29 The

Civil Rights Act30, and the Truth In Lending Act (TILA).31 The

attack on the arbitration clause will be dealt with after

potential state claims have been discussed.

I. The Equal Credit Opportunity Act

The ECOA explicitly prohibits discrimination “against any

applicant, with respect to any aspect of a credit transaction… on

the basis of race, color, religion, national origin, sex or

marital status, or age.”32 “The credit applicant may prove

discrimination in violation of the ECOA by relying on any one of

three different approaches used in the employment discrimination

28 15 USCS § 169129 18 USCS § 196230 18 USCS § 198231 15 U.S.C. § 163832 15 USCS § 1691

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context: (1) direct evidence of discrimination; (2) disparate

impact analysis; and (3) disparate treatment analysis.”33 One of

the major historical uses of this act has been to prevent the

practice of “redlining.” “The term "redlining" is derived from

the actual practice of drawing a red line around designated areas

in which credit is to be denied.”34

This claim can be sustained within that legal framework by

utilizing the disparate impact analysis, and can be proven at a

relatively low cost. While, “a prima facie case of

discrimination requires a showing "that a qualified plaintiff who

is a member of a protected class was disadvantaged in favor of a

person who is not a member of the protected class,” a redlining

claim does not.35 In order to make this claim one must show that

the lender engaged in a pattern of “reverse redlining” by showing

“that the defendants' lending practices and loan terms were

"unfair" and "predatory," and that the defendants either

intentionally targeted on the basis of race, or that there is a

33 Faulkner v. Glickman, 172 F. Supp. 2d 732, 737 (D. Md. 2001)34 Associates Home Equity Services, Inc. v. Troup, 343 N.J. Super. 254, 268 (App.Div. 2001)35 Whitacre v. Davey, 281 U.S. App. D.C. 363, 890 F.2d 1168, 1169-70 (D.C. Cir. 1989)

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disparate impact on the basis of race.”36 “it is not necessary

that the defendants make loans on more favorable terms to anyone

other than the targeted class.”37 Because Title lending

companies are located in high poverty areas, they are also by

correlation also located in historically minority areas, largely

due to long standing structural inequalities. Like Capital City

Mortgage, the mere fact that they also harmed poor whites would

not be sufficient to preclude the claim.

In order to prove this claim inexpensively, one could use

commercial mapping software, such as Google Earth, and overlay

the mapping points for store locations and the census

ethnographic data. This produces a map that includes title

lenders offices located almost exclusively in areas that are

substantially populated by minorities. Since the clear

correlation of these two data sets would certainly show a

disparate impact, this claim should succeed even in an

arbitration forum.

36 See, e.g., Jackson v. Okaloosa County, 21 F.3d 1531, 1543 (11th Cir. 1994)37 Hargraves v. Capital City Mortg. Corp., 140 F. Supp. 2d 7, 20 (D.D.C.2000)

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This claim is has statutory damages of $2000 per offense and

“reasonable” attorneys fees, but are subject to the arbitration

clause within the contract. This claim would be relatively

quick to litigate, and would not require any substantial expert

testimony, since the data sets related to it are government

records and they are both self authenticating and census data is

presumed to be accurate. This cause of action can be litigated

in either state of federal court.

II. RICO

The RICO claim comes into play in combination with the

success of ANY OTHER claim. By establishing any other claim, a

RICO violation occurs, because under the RICO act “the business

of lending money or a thing of value at a rate usurious under

State or Federal law, where the usurious rate is at least twice

the enforceable rate”38 results in the availability of damages

“threefold the damages he sustains and the cost of the suit,

including a reasonable attorney's fee.”39 It is to be noted that

38 18 USCS § 1961(6)39 18 USCS § 1964

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Civil RICO suits are still subject to arbitration, as the court

explains:

It is “now clear that statutory claims may be the

subject of an arbitration agreement, enforceable

pursuant to the FAA. Indeed, in recent years we have

held enforceable arbitration agreements relating … to

the civil provisions of the Racketeer Influenced and

Corrupt Organizations Act.”40

III. The Civil Rights Act

The federal civil rights claims under §1982 holds that “All

citizens of the United States shall have the same right… to

inherit, purchase, lease, sell, hold, and convey real and

personal property.”41 The courts have held that financing in a

discriminatory manner is in and of itself a violation of the

civil rights act, and subject to civil remedies, although this

claim is also subject to the FAA.42 This cause of action can be

litigated in either state of federal court. This claim,

40 Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 26. (U.S. 1991)41 42 USCS § 198242 Old West End Asso. v Buckeye Federal Sav. & Loan, 675 F. Supp. 1100. (1987, ND Ohio)

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unfortunately, does not have statutory damages associated with

it, but does include general tort liability. This is problematic

in the context of a private attorney action because it leaves

little room to prosecute the claim and still maintain an

effective practice.

IV. The Truth in Lending Act

← The TILA requires that the disclosures “shall reflect

the terms of the legal obligation.”43 This claim can only come

into being if the lender made some kind of mistake on the

paperwork, but could be a valuable claim if the attorney pays

close attention to the contract. Furthermore, if the contract is

voided ab initio, then the TILA disclosure is inherently incorrect.

Each specific violation can results in actual damages, statutory

damages of twice the finance charge up to $2,000.00 per account

and attorney fees and costs. 44 This cause of action can be

litigated in either state of federal court.

← V. State Claims←

43 15 U.S.C. § 1638(a)(6) (2013); 12 C.F.R. (Reg. Z) § 1026.18(g) (2013).

44 15 U.S.C. § 1640 (2013).

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← Additionally, there a state specific claims that can be

brought. Some of these claims provide a basis for pursuing a

federal claim, or are sufficient in and of themselves to warrant

examination. The specific states chosen have dramatically

different regulatory structures but are reflective of the

regulation of the industry as a whole.

← a. SOUTH CAROLINA

← A claim against the loan can be brought against the

lender under several South Carolina statutes. The strongest

claim, one that relies on the Titlemax admissions to the SEC in

its bond filing, that Titlemax “knows or should know that the

consumer is unable to make the scheduled payment on the

obligation when due.”45 This is the basis for the law of

unconscionability in South Carolina, “the absence of meaningful

choice on the part of one party due to one-sided contract

provisions, together with terms which are so oppressive that no

reasonable person would make them and no fair and honest person

would accept them. 46 As such the borrower is entitled to actual45 S.C. Code Ann. § 37-5-10846 Fanning v. Fritz's Pontiac-Cadillac-Buick, 322 S.C. 399, 403 (S.C. 1996).

See also, Jones Leasing v. Gene Phillips and Assoc., 282 S.C. 327, 318 S.E.2d 31 (Ct. App. 1984).

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damages under the economic loss rule, and those can include the

actual value of the loss, as well as cost related to filing.

← This is a legislated affirmative duty to the consumer

that requires the lender to be aware of and check the credit

worthiness of a consumer. Failure to do so is, in and of itself

actionable in civil litigation. It also fulfills one of the

required elements of the South Carolina tort of fraud. In South

Carolina the elements of fraud are: “(1) That defendant made a

material representation; (2) that it was false; (3) that when he

made it he knew it was false, or made it recklessly, without any

knowledge of its truth and as a positive assertion; (4) that he made it with

the intention that it should be acted upon by plaintiff; (5) that

plaintiff acted in reliance upon it; and (6) that he thereby

suffered injury."47 Because the lender did no underwriting, they

asserted, despite a lack of underwriting that the borrower could

repay the loan, without any knowledge that the borrower could

repay. A fraudulent contract cannot be enforced, and is treated

as void ab initio.

47 Halsey v. Minnesota-South Carolina Land & Timber Co., 174 S.C. 97, 116 (S.C.1934)

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← If a contract is never properly formed, then the

enforcement of the right of repossession rises to the tort of

conversion, which allows for “punitive damages.”48 Conversion is

the “unauthorized assumption and exercise of the right of

ownership over goods or personal chattels belonging to another,

to… the exclusion of the owner's rights” and the plaintiff must

“establish either title to or right to the possession of the

personal property.”49 However, for this to be a viable cause of

action there must have been a repossession, since South Carolina

law is clear “there can be no conversion of money unless there is

an obligation on the defendant to deliver a specific,

identifiable fund to the plaintiff.”50 Therefore, the only time

that money can be subject to a conversion action is if the

specifically identified funds were converted, such as the

contents of a safe. This means that the conversion happens at

the repossession, not in the illegal taking of funds, which

remains a simple fraud.

48 Daniel v. Post, 181 S.C. 468, 474 (S.C. 1936)49 Regions Bank v. Schmauch, 354 S.C. 648, 667 (S.C. Ct. App. 2003)50 Vercon Constr., Inc. v. Highland Mortg. Co., 2005 U.S. Dist. LEXIS 42585,11 (D.S.C. July 21, 2005).

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Additionally, claims can be made under the South Carolina

Unfair Trade Practices Act. This claim can be made

because “practices which tend to create a monopoly, but embrace

false and fraudulent advertising, misbranding, and other

practices… result in deceiving the public” and “such practices

injure competitors who do not use them.”51 Therefore these are

“unfair methods of competition and unfair or deceptive acts or

practices in the conduct of any trade or commerce are hereby

declared unlawful.”52 “If the court finds… a willful or knowing

violation of § 39-5-20, the court shall award three times the

actual damages sustained” and “the court shall award to the

person bringing such action under this section reasonable

attorney's fees and costs.”53 The deception emerges within the

loan transaction when the borrower is lead to believe that the

interest rate is a fair reflection of the risk taken by the

lender. Since a title loan is rarely, if ever, a reflection of

the full book value of the vehicle, and the loan is over secured

51 Consolidated Book Publishers, Inc. v. Federal Trade Com., 53 F.2d 942, 945 (7th Cir. 1931)52 S.C. Code Ann. § 39-5-2053 S.C. Code Ann. § 39-5-140

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it is fundamentally unfair to the consumer to charge interest

rates that so far exceed the relevant interest rates.

Furthermore, there is an actionable breach of the duty of

good faith and fair dealing, entitling the borrower to actual

damages. Because the lender only lends a certain percentage of

the value of the vehicle, their potential losses are non-

existant. The mere act of lending less than the value of the

asset ensures that they cannot experience a loss in default, so

the act of charging interest that vastly exceeds any potential

risk to the lender makes the loan a bad faith arrangement.

b. Virginia

← In the Virginia context the state legislature enacted a

statutory scheme that specifically permits title lenders to

charge what would otherwise be usurious rates of interest for car

title loans, but requires absolute compliance by title lenders

with its requirements and prohibitions.54 As the legislature made

clear - All exceptions to “Virginia’s twelve percent (12%)

interest rate cap… must be strictly construed against the

54 Va. Code Ann. §§ 6.2-2200 through 6.2-2227 (“Motor Vehicle Title Loan Act” or “MVTLA”).

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lender.”55 Furthermore, the MVTLA provides that “any provision” of

a title loan agreement that violates a requirement of the Act is

unenforceable against the borrower and “any violation of the

Act’s provisions shall constitute a prohibited practice… and

shall be subject to any and all of the enforcement provisions of

the Virginia Consumer Protection Act.”56 The Virginia General

Assembly made a violation of the MVTLA a per se violation of the

VCPA: “Any violation of the provisions of this chapter shall

constitute a prohibited practice” under the VCPA.57

A major factor in the statute limiting the borrower’s

liability for high cost loans prohibits title lenders from

extending loans for a principal amount in excess of fifty percent

(50%) of the fair market value of the motor vehicle, and

specifies that such “value shall be determined by reference to

the loan value for the motor vehicle specified in a recognized

pricing guide.”58 This is an important provision, because the

goal of Titlemax is to maximize the loan size, to ensure interest

55 Radford v. Community Mortgage & Investment Corp., 226 Va. 596, 602 (1984).56 Va. Code Ann. §§ 6.2-2224, 6.2-2227. (emphases added)57 Va. Code Ann. § 6.2-2227.58 Va. Code Ann. § 6.2-2215(1)(d).

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payments of the maximum amount. However, their employees are not

trained automotive appraisers, and are unlikely to, and are

incentivized not to, downgrade the value of the vehicle to

reflect its actual valuation. If so they are likely to over value

the vehicle, and thusly breach the affirmative duties given to

Titlemax under the MVTLA. If the violations are willful Titlemax

would liable for an amount equal to three times the actual

damages or $1,000.00, whichever is greater, and for reasonable

attorney fees and court costs. In the Alternative, if the conduct

were not willful, Titlemax would be liable for actual damages or

statutory damages of $500.00, whichever is greater, and for

reasonable attorney fees and costs. 59

← If there can be some fault discovered in the valuation

of the vehicle, then the resulting loan is a violation of the

MVTLA, and as such is a violation of the states usury laws. And,

unless a higher rate is otherwise permitted by law, Virginia’s

usury laws prohibit interest on a loan at a rate in excess of

twelve percent (12%) per year.60 The usage of interest rates in

excess of 100% APR made in violation of MVTLA are usurious and59 Va. Code Ann. § 59.1-204.60 Va. Code Ann. § 6.2-303.

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entitles the plaintiff to the total amount of excess interest

paid, twice the total amount of interest paid in the preceding

two years, and to court costs and reasonable attorney fees. 61

This violation would then allow the above-mentioned RICO claim to

be brought in conjunction with the existing statutory claim.

D. Does The Claim Get Sent To Arbitration?

To void an arbitration clause, it must be both voidable

under the general contract law of the state whose law governs the

transaction. The general rules of procedural and substantial

unconscionability will generally determine the unconscionability

of the clause. However, more recent contracts are less likely to

be successfully attacked because of the adjustments made to the

contract to reflect recent Supreme Court precedent where more

consumer friendly arbitration agreements have been held to be

conscionable.62Furthermore, when “state law prohibits outright61 Va. Code Ann. § 6.2-305.62 AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1747 (U.S. 2011) (California In Discover Bank, held that:

“[W]hen the waiver is found in a consumer contract of adhesion in a setting in which disputes between the contracting parties predictably involve small amounts of damages, and when it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of

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the arbitration of a particular type of claim, the analysis is

straightforward: The conflicting rule is displaced by the FAA.”63

Since The Concepcion ruling Titlemax has changed their arbitration

agreement from their old and extremely anti-consumer arbitration

agreement, to a modern, and more consumer friendly one. The

individually small sums of money, then . . . the waiverbecomes in practice the exemption of the party 'from responsibility for [its] own fraud, or willful injury to the person or property of another.' Under these circumstances, such waivers are unconscionable under California law and should not be enforced.” Id., at 162,113 P. 3d, at 1110 (quoting Cal. Civ. Code Ann. § 1668).

AT&T Mobility LLC had an arbitration clause that had extremelyconsumer friendly terms such as: AT&T must pay all costs fornonfrivolous claims; the arbitration must take place in thecounty in which the customer is billed; for claims of $10,000 orless, the customer may choose whether the arbitration proceeds inperson, by telephone, or based only on submissions; either partymay bring a claim in small claims court in lieu of arbitration;and that the arbitrator may award any form of individual relief,including injunctions and the agreement denied AT&T any abilityto seek reimbursement of its attorney's fees, and a $7,500minimum recovery, and twice the amount of the claimant'sattorney's fees. Those terms were held to be consumer friendlyenough that the California Blanket Discover Bank rule underminedthe FAA. As such the Discover Bank rule was overturned. Sincethen, most modern arbitration clauses are modeled on the AT&Tclause.)

63 AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1747 (2011)

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substantive rights it gives consumers will make it difficult to

defeat in litigation.

The new arbitration agreement includes several post

Concepcion additions. These additions include a shift from the

old fee model of joint fees and the Expensive Commercial

arbitration rules to the American Arbitration Association rules

for consumer arbitration, the new contract also states that

Titlemax will cover the cost of the arbitration except for an

amount “not to exceed the amount which would have been assessed

as court costs if the dispute had been resolved by a state court

with jurisdiction.”64 An additional clause that might be helpful

to the consumer is the addition of the option of selecting a

“local arbiter.”65 Additionally, the arbitration clause does not

strip a borrower of all potential court access, as the Virginia

contract still leaves open “the right to seek adjudication in

General District Court.”66 However, the exclusive appeal from

General District Court is with the Arbitration Panel. The most

problematic of the contractual clauses is the Opt-out clause

64 (Titlemax Contract 3, August 2012.)65 Id.66 Id.

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which gives the borrower 60 days to opt out of the arbitration

clause. By doing so it undermines what in the past have been

effective tactics to escape the arbitration provision by

essentially arguing ambush and that the borrower had been rushed

through the process this argument may still have some life in it

because the borrower would have no reason to complain about the

transaction until it the billing cycle begins in earnest – 60

days the exact amount of time given to opt out of arbitration.

Given its close modeling of many of the Concepcion provisions it

is likely that the new arbitration clause will withstand

challenge in court.

However, all is not lost, the FAA states that “written

provision in any . . . contract evidencing a transaction

involving commerce to settle by arbitration a controversy

thereafter arising out of such contract or transaction . . .

shall be valid, irrevocable, and enforceable, save upon such grounds

as exist at law or in equity for the revocation of any contract."67 This does

present a bar to suit, but not one that cannot be overcome by the

state law based attacks to the formation of contract in general.

67 9 U.S.C. § 2 (2013).

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These include attacking the adhesive nature of the contract,

citing the lack of bargaining power of the borrower,

As a matter of law a contract of adhesion is, in some

states, in and of itself sufficient to prove procedural

unconscionability. However this is not the case in most states

where there must be some kind of aggravating factor to the

contract of adhesion – for example in Wis. Auto Title Loans, Inc. v. Jones,

the Supreme Court of Wisconsin used the following factors

“Wisconsin Auto Title Loans was in the business of providing

loans with automobile titles as collateral and was experienced in

drafting such loan agreements…was in a position of substantially

greater bargaining power than the borrower; the borrower was

indigent and in need of cash; and the loan agreement was an

adhesion contract presented to the borrower on a take-it-or-

leave-it basis.”68 In the alternative, some courts only require

that if there is substantial bargaining inequality that the terms

of the arbitration agreement be examined closely. Another

factor in federal jurisprudence is that the arbitration clause be

easily available to the signer for review. The Missouri district

68 Wis. Auto Title Loans, Inc. v. Jones, 2006 WI 53 (Wis. 2006)

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court held that a Titlemax arbitration clause was invalid because

“the Arbitration Rider to the Plaintiffs in circumstances that

discouraged careful consideration and critical thinking, and”…

because the Plaintiffs were rushed “through the process of

signing the documents… (and those) practices constitute indicia

of procedural unconscionability.” 69

I. South Carolina

In South Carolina the enforceability of an arbitration

clause is determined in the same way as all other contracts, and

all of the "general contract defenses, which exist under state

law and apply to all contracts” are applicable.70 Furthermore,

the “courts may invalidate arbitration agreements on general

state law such as fraud, duress, and unconscionability."71 In

South Carolina, unconscionability is "the absence of meaningful

choice on the part of one party due to one-sided contract

provisions, together with terms that are so oppressive that no

reasonable person would make them and no fair and honest person

69 Sprague v. Household Int'l, 473 F. Supp. 2d 966, 972 (W.D. Mo. 2005)70 York v. Dodgeland of Columbia, Inc., 749 S.E.2d 139, 145 (S.C. Ct. App.2013)71 Zabinski, 346 S.C. at 593

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would accept them."72 The Absence of meaningful choice on the

part of one party “speaks to the fundamental fairness of the

bargaining process.”73 To determine whether a contract was

“tainted by an absence of meaningful choice,” the

“courts should take into account the nature of the injuriessuffered by the plaintiff; whether the plaintiff is a substantialbusiness concern; the relative disparity in the parties'bargaining power; the parties' relative sophistication; whetherthere is an element of surprise in the inclusion of thechallenged clause; and the conspicuousness of the clause."74

Furthermore, an adhesion contract for the purpose of financing of

an automobile receives "considerable skepticism," although “it is

not, per se, unconscionable.” 75 Given the almost certain lack of

sophistication on the part of a title loan customer, the

extremely bad deal with likely loss of an automobile, and the

lack of bargaining power possessed by a poor credit borrower, the

arbitration clause may be able to be defeated in South Carolina.

II. Virginia

72 Simpson, 373 S.C. at 24-2573 Id.74 Id. (internal citations and quotation marks omitted).75 York v. Dodgeland of Columbia, Inc., 749 S.E.2d 139, 148-149 (S.C. Ct. App. 2013)

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Virginia law, like South Carolina law, recognizes the

traditional defenses to contract, and, as such, the defense to

the arbitration clause lies in unconscionability doctrine.

Virginia, like many states, has adopted the definition of the

Supreme Court for unconscionability - “an agreement is

unconscionable if no person in his senses would make it on the

one hand and no fair and honest person would accept it on the

other.” 76 Virginia law is clear – “The court should not compel

arbitration where the arbitration clause is unconscionable.”77

One widely cited decision on Virginia unconscionability law,

which specifically deals with motor vehicle finance, holding that

a contract of adhesion, defined as a “standard form contract,

prepared by one party and presented to a weaker party--usually, a

consumer--who has no bargaining power and little or no choice

about the terms,” was indicative of an unconscionable

agreement.78 It also pointed out, that the consumer has little

choice, saying “It is apparent that even if the consumers

76Hume v. United States, 132 U.S. 406, 33 L. Ed. 393, 10 S. Ct. 134 (1889).77Philyaw v. Platinum Enters., 54 Va. Cir. 364, 367 (Va. Cir. Ct. 2001)78Philyaw, 54 Va. Cir. 364, 367, citing BLACK'S LAW DICTIONARY (7thEd.) p. 318.

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understood the ramifications of the arbitration clause, they

could not have bargained for better terms.”79 Key in this

discussion is the question of the understandability of the terms.

If the consumer does not understand them, how could they agree to

them?

Even when discussing the arbitration agreements it holds up,

the Virginia courts look to “the lack of bargaining power” when

determining the applicability of the arbitration agreement.80

The least empowered consumer in modern finance is probably the

title loan customer, as such, there is the small chance to defeat

the arbitration agreement.

E. Is It Even Necessary To Void The Arbitration Clause?

If the goal is to get into court, then the arbitration

agreement can be used as a weapon against the defendant. Since

the arbitration clause in the contract is a post-Concepcion

arbitration agreement that has been written to have strongly

79Philyaw v. Platinum Enters., 54 Va. Cir. 364, 367 (Va. Cir. Ct. 2001)80 Bramow v. Toll Va, L.P., 67 Va. Cir. 56, 59 (Va. Cir. Ct. 2005)(Where the court holds that a real estate sales contract hasdifferent kinds of consumer bargaining power than consumer salescontracts.)

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consumer friendly, it can be used as a weapon of disruption and

to create expense.

This line of attack uses the explicit contractual

provisions, designed by Titlemax to shield itself from liability,

as weapons. The arbitration agreement states that Titlemax “will

advance”81 the borrowers portion of the arbitration fees.

Furthermore, the contract limits the borrowers exposure for the

cost of arbitration to “the cost of court fees” had the consumer

filed in a state court with jurisdiction.82 What this means is

that the act of arbitrating with every single borrower is only an

economical choice if the arbitration clause is not used

extensively by large numbers of borrowers. So the correct

response to this confluence of terms is to gather large numbers

of potential plaintiffs, and have each of them file for an

individual arbitration.

Since Titlemax is almost exclusively responsible for the

expense associated with arbitration, its cost exposure is

substantial. For example, a single arbitration, under the

American Arbitration Association rules and cost structure can81 (Titlemax Contract, 3 ¶5.)82 Id.

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cost upwards of $1075 dollars in just filing fees.83 That is in

addition the expected cost of an associate attorney at their

white shoe firm for a minimum of 10 hours, at $250/hr.84 There

are also the cost associated with paying the arbiter, an expense

that Titlemax accepts responsibility for, which can exceed

$300/hour, and they will sure spend at least a few, lets say 10,

hours examining and researching the issues. As such, one can

drive the singular cost of a single Arbitration up to ~$6075.85

In order to use the generous fee adoption proposals to the

advantage of the consumer, one need only get a substantial client

base to file a large number of individual arbitrations, driving

cost astronomically high to defend claims that individually are

lower than the cost of arbitration. By using the arbitration

provisions modern formulation against the lender you can force

settlement for individual claims, or if potentially use the

expense of individual arbitration to make a class action trial

cheaper than a large number of individual arbitrations. 83 Commercial Arbitration Rules, AMERICAN ARBITRATION ASSOCATION (1/07/2014), Available at http://www.adr.org/aaa/ShowPDF?doc=ADRSTG_00410284 Entry level associate, listed billing rate at Nelson Mullins.85 This figure was reached by calculating the filing cost, plus 10 hours of arbiter and attorney time at $550/hour total.

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While arbitration forums tend to have less consumer friendly

outcomes, the existence of specific dollar amount penalties

limits the arbiter’s discretion in awarding penalties. If a

violation is found to occur, then the penalty is statutory and

not subject to the arbiter’s discretion. As such Titlemax, or

for that matter, any other title lender should present a

profitable target for litigation.

The arbitration clause may very well protect them from the

risks of litigation, but it can be an expensive shield.

Furthermore, since the arbitration clause has been modified so

that its cost allocation is Concepcion compliant a well-funded

public interest attorneys office could use the arbitration

agreement as economic weapon against its maker every loan would

cost thousands to defend, and would generate far less revenue

than it would cost to defend.

Problematically, given the nature of the business in

question, and the strong negative effects an actual court ruling

could have on the core of the defendants business model itself it

is possible that, like the tobacco companies and other large

corporate entities who are more endangered by a court record than

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they are by losing some amount of revenue, they may simply

arbitrate every single claim for the sole purpose of avoiding an

actual precedent that could then be cited in future disputes.

4) CONCLUSION

The best outcome, at least for the country as a whole, would

be some kind of effective national usury law that would reign in

and control interest rates and prevent predatory lending. That

is unlikely given the current political situation nationally.

Therefore, the control of these institutions is left to the

individual states, and by all appearances they have neither the

inclination, nor the functional ability to control the growth of

these predatory lenders. However, the Title Loan industry can be

attacked using both classical contract law and modern statutory

claims. Under ideal circumstances, title lenders would present

to a jury an unsympathetic, at best, and more likely an easily

villainous defendant. But a jury may not be accessible. Title

lenders are a plague upon the poor, but they are not completely

immune from claims that can be used to reign in their practices,

and perhaps repair the damage done to it’s previous victims.

There is no question that the business here in question presents

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a risk to low income consumers, and that any legal action taken

against them at a minimum carries the moral weight of justice

with it, and could be a viable revenue generation model for a

plaintiffs firm.

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