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RENDERED: JUNE 19, 2009; 10:00 A.M.
TO BE PUBLISHED
Commonwealth of Kentucky
Court of Appeals
NO. 2008-CA-001204-MR
VALUED SERVICES OF
KENTUCKY, LLC; ANGELA
JACKSON; AND MARY DEPUE APPELLANTS
APPEAL FROM FAYETTE CIRCUIT COURT
v. HONORABLE THOMAS L. CLARK, JUDGE
ACTION NO. 08-CI-01340
FLOYD WATKINS APPELLEE
OPINION
AFFIRMING
** ** ** ** **
BEFORE:
CAPERTON AND STUMBO, JUDGES; BUCKINGHAM,1 SENIOR JUDGE.
BUCKINGHAM, SENIOR JUDGE:
This is an appeal from an order of the
Fayette Circuit Court denying a motion to compel arbitration made by Valued
1 Senior Judge David C. Buckingham sitting as Special Judge by assignment of the Chief Justice
pursuant to Section 110(5)(b) of the Kentucky Constitution and Kentucky Revised Statutes
(KRS) 21.580.

Services of Kentucky, LLC, a check-cashing company, and two of its employees,
Angela Jackson and Mary Depue (hereinafter collectively referred to as Valued
Services), in a false imprisonment action filed by Floyd Watkins. The trial court
denied the motion on the ground that the arbitration provision of Watkins’s
“payday loan” contract with Valued Services was unconscionable. For the reasons
discussed below, we affirm.

On February 21, 2007, Floyd Watkins obtained a cash advance in the
amount of $250 from Valued Services, which did business in Lexington under the
name of Check Advance. As part of the loan transaction, Watkins signed a
document entitled “Customer Agreement.” Watkins had obtained loans from
Valued Services on five previous occasions, and on each of those previous
occasions, he had signed an identical “Customer Agreement.” These customer
agreements always included an identical arbitration provision.

Under the terms of the cash advance that Watkins obtained on
February 21, he was required to repay the loan by March 15. Although he had
always repaid the prior loans promptly, on this occasion Watkins claimed that he
was unable to repay the loan on time. According to the allegations in Watkins’s
complaint, he telephoned Valued Services in mid-March and told them that he was
out of state but would return in approximately one week, when he would repay the
cash advance.

Upon his return to Lexington, Watkins went to the Check Advance
store on Friday, March 23, and informed the store manager, Angela Jackson, that
he could not repay his loan on that day, but that he would be able to do so three
days later, on Monday, March 26. Jackson insisted that Watkins had to repay the
entire amount that day and stated that he was not leaving the premises until he had
paid in full. Jackson pushed a button to lock the office door and would not allow
Watkins to leave even though he repeatedly asked to do so.

Jackson telephoned her regional manager, Mary Depue, and told her
that “I have a black guy over here that refuses to pay his bill and he’s not going to
leave until he does.” Watkins then spoke to Depue and told her that he had always
repaid his loans on prior occasions, that he had to make his automobile loan
payment that day, and that he would repay Check Advance in full on Monday,
March 26. Depue then spoke to Jackson again. Jackson stated, “He’s going to pay
his bill or he’s not leaving . . . I want my money now!”

Payday Loan Laws and Legislation

Watkins attempted to leave the office, but Jackson again refused to
unlock the door, stating, “You ain’t going nowhere until you pay me my money.”
Watkins again tried to leave, pushing on the office door. He told Jackson if she did
not allow him to leave, he would call the police. In response, she shouted, “I don’t
care who you call, you are not going until you pay me my money.” Watkins
finally persuaded Jackson to allow him to use the office telephone to call a friend
to bring the money to repay the loan. Watkins instead called 911 and asked for the
police, telling the dispatcher that he was being held against his will at the Check
Advance store.

Watkins was finally able to leave the office after the arrival of the
police. He had been detained at the office for about one hour. Jackson told the
investigating police officer that she had been instructed by Depue not to allow
Watkins to leave the premises even if he called the police.

Watkins filed a complaint against Valued Services, Jackson, and
Depue in the Fayette Circuit Court on March 20, 2008, alleging false imprisonment
and seeking equitable and legal relief including declaratory and injunctive relief,
attorney’s fees, compensatory damages, costs, and punitive damages.
Valued Services moved the trial court for an order compelling
arbitration (and staying litigation pending the outcome of arbitration) arguing that
the Customer Agreement governing the loan transaction between Watkins and
Valued Services subjected his claims to mandatory arbitration, specifically a
subsection of the agreement that required arbitration of “all common law claims,
based upon contract, tort, fraud, or other intentional torts.” Following briefing and
oral argument, the trial court denied the motion, holding that the arbitration
provision requiring Watkins to arbitrate claims that did not arise from the
underlying loan transaction was unconscionable. Valued Services filed this appeal,
arguing that the arbitration provision was neither procedurally nor substantively
unconscionable and that the trial court erred as a matter of law in refusing to
compel arbitration.

The arbitration provision is set forth on the second page of the two page
Customer Agreement signed by Watkins. The customer’s signature is affixed
to the first page of the agreement, directly beneath the following statement in bold
typeface:
Please note that this Agreement contains a binding
arbitration provision. By signing this Agreement you
acknowledge that it was filled in before you did so and
that you have received a completed copy of it. . . . You
further acknowledge that you have read, understand,
and agree to all of the terms on both pages of this
Agreement, including the provision entitled “Waiver
of Jury Trial and Arbitration Provision”, which is
located on the second page of this Agreement and is
marked Page 2 of 2.

Page 2 contains a full page of text in fine print. After supplying a
definition of arbitration, it sets forth the following arbitration provision. The only
claims that it exempts from arbitration are those brought in small claims court.
THEREFORE, YOU ACKNOWLEDGE AND
AGREE AS FOLLOWS:
1. For purposes of this Waiver of Jury Trial and
Arbitration Provision (hereinafter the “Arbitration
Provision”), the words “dispute” and “disputes” are given
the broadest possible meaning and include, without
limitation (a) all claims, disputes, or controversies arising
from or relating directly or indirectly to the signing of
this Arbitration Provision, the validity and scope of this
Arbitration Provision and any claim or attempt to set
aside this Arbitration Provision; (b) all federal or state
law claims, disputes or controversies, arising from or
relating directly or indirectly to this Customer Agreement
(including the Arbitration Provision), the information you
gave us before entering into this Customer Agreement,
including the Customer Application, and/or any past
agreement or agreements between you and us; (c) all
counterclaims, cross-claims and third-party claims; (d) all
common law claims, based upon contract, tort, fraud, or
other intentional torts; (e) all claims based upon a
violation of any state or federal constitution, statute or
regulation; (f) all claims asserted by us against you,
including claims for money damages to collect any sum
we claim you owe us; (g) all claims asserted by you
individually against us and/or any of our employees,
agents, directors, officers, shareholders, governors,
managers, members, parent company or affiliated entities
(hereinafter collectively referred to as “related third
parties”), including claims for money damages and/or
equitable or injunctive relief; (h) all claims asserted on
your behalf by another person; (i) all claims asserted by
you as a private attorney general, as representative and
member of a class of persons, or in any other
representative capacity, against us and/or related third
parties (hereinafter referred to as “Representative
Claims”); and/or (j) all claims arising from or relating
directly or indirectly to the disclosure by us or related
third parties of any non-public personal information
about you.
2. You acknowledge and agree that by entering into this
Arbitration Provision:
(a) YOU ARE WAIVING YOUR RIGHT TO
HAVE A TRIAL BY JURY TO RESOLVE
ANY DISPUTE ALLEGED AGAINST US OR
RELATED THIRD PARTIES;
(b) YOU ARE WAIVING YOUR RIGHT TO
HAVE A COURT, OTHER THAN A SMALL
CLAIMS TRIBUNAL, RESOLVE ANY
DISPUTE ALLEGED AGAINST US OR
RELATED THIRD PARTIES; and
(c) YOU ARE WAIVING YOUR RIGHT TO
SERVE AS A REPRESENTATIVE, AS A
PRIVATE ATTORNEY GENERAL, OR IN
ANY OTHER REPRESENTATIVE
CAPACITY, AND/OR TO PARTICIPATE AS
A MEMBER OF A CLASS OF CLAIMANTS,
IN ANY LAWSUIT FILED AGAINST US
AND/OR RELATED THIRD PARTIES.
. . . .
6. All parties, including related third parties, shall retain
the right to seek adjudication in the Kentucky state Small
Claims Court and District Courts for disputes within the
scope of such courts’ jurisdiction. All disputes asserted
in a Kentucky state Circuit Court shall be resolved by
binding arbitration. Any dispute, which cannot be
adjudicated within the jurisdiction of a Kentucky Small
Claims Court or District Court, as the case may be, shall
be resolved by binding arbitration. Any appeal of a
judgment from a Kentucky state District court shall be
resolved by binding arbitration.
. . . .
8. This Arbitration Provision is binding upon and
benefits you, your respective heirs, successors and
assigns. The Arbitration Provision is binding upon
and benefits us, our successors and assigns, and
related third parties. The Arbitration Provision
continues in full force and effect, even if your
obligations have been paid or discharged through
bankruptcy. The Arbitration Provision survives any
termination, amendment, expiration or performance
of any transaction between you and us and continues
in full force and effect unless you and we otherwise
agree in writing.

As a general rule, “Kentucky law favors arbitration agreements.”
Mortgage Electronic Registration Systems, Inc. v. Abner, 260 S.W.3d 351, 353
(Ky. App. 2008). KRS 417.050 provides in pertinent part that “[a] written
agreement to submit any existing controversy to arbitration or a provision in
written contract to submit to arbitration any controversy thereafter arising between
the parties is valid, enforceable and irrevocable[.]” Valued Services argues that the
express language of the statute, referring to “any controversy,” mandates the
enforcement of precisely the type of broad, all-encompassing arbitration agreement
at issue here. But the statute also contains a savings clause that permits a party to
avoid an arbitration agreement “upon such grounds as exist at law for the
revocation of any contract.” “In other words, the court – not an arbitrator – must
decide whether the parties have agreed to arbitrate based on fundamental principles
governing contract law.” Abner, 260 S.W.3d at 353.

It is a fundamental rule of contract law that, “absent fraud in the
inducement, a written agreement duly executed by the party to be held, who had an
opportunity to read it, will be enforced according to its terms.” Conseco Finance
Servicing Corp. v. Wilder, 47 S.W.3d 335, 341 (Ky. App. 2001) (citing Cline v.
Allis-Chalmers Corp., 690 S.W.2d 764 (Ky. App. 1985)). A narrow exception to
this rule is the doctrine of unconscionability, which
is used by the courts to police the excesses
of certain parties who abuse their right to
contract freely. It is directed against one-sided,
oppressive and unfairly surprising
contracts, and not against the consequences
per se of uneven bargaining power or even a
simple old-fashioned bad bargain.
An unconscionable contract has been characterized
as one which no man in his senses, not under delusion,
would make, on the one hand, and which no fair and
honest man would accept, on the other.
Unconscionability determinations being inherently fact sensitive,
courts must address such claims on a case-by-case
basis.

Id. at 341-42 (citations and quotation marks omitted) (emphasis supplied).
In its order denying the motion to compel, the trial court held that
the averments of Plaintiff’s Complaint concern issues
completely outside the scope of the contract in question,
and it would be unfairly surprising to compel binding
arbitration of these issues. These issues do not relate to
the underlying contract and could not reasonably have
been contemplated by the parties as subject to arbitration.
By analogy, the Court believes that ordering compulsory
arbitration of the issues raised herein would be akin to
ordering compulsory arbitration had Defendants sent 2
men to Plaintiff’s house to break his legs because he was
behind in his payments.

Although the trial court did not employ these terms, Valued Services
has challenged its finding of unconscionability under two categories: procedural
unconscionability and substantive unconscionability. Procedural or “unfair
surprise” unconscionability “pertains to the process by which an agreement is
reached and the form of an agreement, including the use therein of fine print and
convoluted or unclear language. . . .” Id. at 342-43, n.22. In Conseco, this Court
determined that an arbitration clause was not procedurally unconscionable on the
following grounds:
The clause was not concealed or disguised within the
form; its provisions are clearly stated such that
purchasers of ordinary experience and education are
likely to be able to understand it, at least in its general
import; and its effect is not such as to alter the principal
bargain in an extreme or surprising way.
Id. at 343.
Valued Services maintains that the same conditions prevailed in this
case: that the arbitration provision was boldly displayed and its existence twice
emphasized elsewhere in the contract document; that the terms of the provision
were plainly and thoroughly explained, using everyday language capable of being
understood by persons of ordinary education and experience; that the waiver of the
right to a jury trial was emphasized in a bold font and capital letters; that Watkins
was given every opportunity to read the provision; and that the provision did not
alter the principal bargain – the loan transaction – between Valued Services and
Watkins in an extreme or surprising fashion.

What is not clear, however, is whether a person of ordinary education
and experience would understand that his waiver of a jury trial extended far
beyond disputes relating to the payday loan to encompass every imaginable
unrelated claim that might arise between him (and his heirs, successors, and
assigns) and Valued Services and its “employees, agents, directors, officers,
shareholders, governors, managers, members, parent company or affiliated
entities.” Would an individual like Watkins, when he obtained a loan advance for
the relatively small sum of $250, understand that in so doing he had permanently
waived his right to ever bring a civil action against the company and its employees
for the commission of an intentional tort?

“It is difficult to fathom that one would knowingly compromise her
right to sue for intentional tort claims.” Solis v. Evins, 951 S.W.2d 44, 51 (Tex.
App. 1997). The Supreme Court of South Carolina has stated that
[b]ecause even the most broadly-worded arbitration
agreements still have limits founded in general principles
of contract law, this Court will refuse to interpret any
arbitration agreement as applying to outrageous torts that
are unforeseeable to a reasonable consumer in the context
of normal business dealings.

Aiken v. World Finance Corp. of South Carolina, 644 S.E.2d 705, 709 (S.C. 2007)
(footnote omitted). Although such a rule of interpretation does not exist in
Kentucky law, it is particularly applicable in this case. “As with any contractual
matter our main concern in deciding the scope of arbitration agreements is to
faithfully reflect [] the reasonable expectations of those who commit themselves to
be bound by [them].” Leadertex, Inc. v. Morganton Dyeing & Finishing Corp., 67
F.3d 20, 28 (2nd Cir. 1995) (citation and quotations marks omitted).
Moreover, a broad waiver of the type at issue here is particularly
suspect when it is contained in a contract of adhesion. In Conseco, this Court gave
as an example of procedural unconscionability
‘material, risk-shifting’ contractual terms which are not
typically expected by the party who is being asked to
‘assent’ to them and often appear [ ] in the boilerplate of
a printed form. The notion of procedural
unconscionability thus includes many of the concerns
raised by contracts of adhesion.
Conseco, 47 S.W.3d at 343 n.22 (citations omitted).
“[T]here is a significant difference between an adhesion contract in
which the parties have disparate bargaining power and a contract which voluntarily
has been entered into by sophisticated and knowledgeable businessmen concerning
a financial transaction of considerable magnitude.” Buck Run Baptist Church, Inc.
v. Cumberland Sur. Ins. Co., Inc., 983 S.W.2d 501, 504 (Ky. 1998). The
arbitration agreement in this case is undeniably a contract of adhesion made
between parties with disparate bargaining power, and the waiver of the right to
pursue a civil action in circuit court is certainly a material contractual term, which
is stated in fine print within the boilerplate of the printed form. Recently, in
finding an arbitration clause in a mortgage contract to be unconscionable, this
Court quoted with approval a West Virginia court which “while noting that a
bargain is not unconscionable merely because the parties to it are unequal in
bargaining position, held that an arbitration clause that contains a ‘substantial
waiver of a parties’ rights’ is unenforceable.’” Abner, 260 S.W.3d at 354 (citing
Arnold v. United Companies Lending Corp., 204 W.Va. 229, 511 S.E.2d 854, 861-
862 (1998)).

Valued Services also contends that the arbitration provision is not
substantively unconscionable. Substantive unconscionability “refers to contractual
terms that are unreasonably or grossly favorable to one side and to which the
disfavored party does not assent.” Conseco, 47 S.W.3d at 343, n.22 (citation
omitted). Valued Services argues that the arbitration provision is not substantively
unconscionable because it is equally binding on both parties, obligates Valued
Services to advance the customer’s portion of the arbitration fees, which the
customer is not obliged to reimburse, and does not limit the remedies available to
the customer. Valued Services reiterates that the wording of KRS 417.050
recognizes that parties to a contract may agree to submit “any controversy”
between them to arbitration, not exclusively controversies relating to the
underlying contract. It also cautions that if we should affirm the order of the trial
court, we would improperly create public policy by deciding that an agreement that
does no more than what the General Assembly expressly condones is
unconscionable.

As we have already stated, however, unconscionability is a well established
doctrine of contract law in Kentucky, and it is well within the province
of the courts to find any contract, including one made pursuant to KRS 417.050,
unconscionable. This point was made very effectively in an opinion of the U.S.
Court of Appeals for the Seventh Circuit in regard to the relationship between the
Federal Arbitration Act and contract law:
Nothing in the Federal Arbitration Act overrides normal
rules of contractual interpretation; the Act’s goal was to
put arbitration on a par with other contracts and eliminate
any vestige of old rules disfavoring arbitration.

Arbitration depends on agreement, see First Options of
Chicago, Inc. v. Kaplan, 514 U.S. 938, 943, 115 S.Ct.
1920, 131 L.Ed.2d 985 (1995); AT & T Technologies,
Inc. v. Communications Workers, 475 U.S. 643, 648-49,
106 S.Ct. 1415, 89 L.Ed.2d 648 (1986), and nothing
beats normal rules of contract law to determine what the
parties’ agreement entails. There is no denying that
many decisions proclaim that federal policy favors
arbitration, but this differs from saying that courts read
contracts to foist arbitration on parties who have not
genuinely agreed to that device.

Stone v. Doerge, 328 F.3d 343, 345 (7th Cir. 2003).
Case law from other states is replete with examples of courts
upholding the principle that “even the broadest arbitration clauses obviously
cannot cover every type of dispute that might arise.” RN Solution, Inc. v. Catholic
Healthcare West, 81 Cal.Rptr.3d 892, 902 (Cal.Ct.App. 2008).
To hold otherwise would allow persons signing broad
arbitration provisions to commit intentional torts against
one another, which torts are outside the scope of their
contemplated dealings, without concern that they might
have to answer for their actions before a jury of their
peers.

Fountain Finance, Inc. v. Hines, 788 So.2d 155, 158 (Ala. 2000) (citation omitted).
See also Coors Brewing Co. v. Molson Breweries, 51 F.3d 1511, 1516 (10th Cir.
1995) (“if two small business owners execute a sales contract including a general
arbitration clause, and one assaults the other, we would think it elementary that the
sales contract did not require the victim to arbitrate the tort claim because the tort
claim is not related to the sales contract.”)

There is no case law in Kentucky that addresses the type of broad
arbitration provision at issue here. But an almost identical arbitration agreement,
made pursuant to a payday loan, was the subject of an opinion by the U.S. Court of
Appeals for the Seventh Circuit. See Smith v. Steinkamp, 318 F.3d 775 (7th Cir.
2003). In that case, a payday loan borrower, Smith, signed an agreement
containing an arbitration provision very similar to the one in this case. Smith took
out another loan some time later, but she did not sign the agreement on that
occasion. The payday lender, Instant Cash, argued that the terms of the arbitration
provision in the earlier loan agreement also governed all future loans that were
made to Smith.

In discussing the terms of the arbitration provision, the Court, in an
opinion authored by Judge Richard Posner, held that the sections waiving the right
to a jury trial had to be interpreted as relating in some way to the underlying loan
agreement. The concerns expressed by Judge Posner mirror almost exactly those
of the trial court in this case:
If (b) through (f) [which correspond almost exactly to
sections 1(b) through (f) in the Valued Services
arbitration provision] are read as standing free from any
loan agreement, absurd results ensue, for example that if
Instant Cash murdered Smith in order to discourage
defaults and her survivors brought a wrongful death suit
against Instant Cash (a “common law” suit, thus
encompassed by (c)), Instant Cash could insist that the
wrongful death claim be submitted to arbitration. For
that matter, if an employee of Instant Cash picked
Smith’s pocket when she came in to pay back the loan,
and Smith sued the employee for conversion, he would
be entitled to arbitration of her claim. It would make no
difference that the conversion had occurred in Smith’s
home 20 years after her last transaction with Instant
Cash.

The defendants’ lawyer blanched when confronted
with such hypothetical cases at oral argument but was
unable to suggest a limiting principle.
Smith, 318 F.3d at 777.

The Smith court accordingly held that the arbitration agreement signed
by Smith when she took out the initial loan was inapplicable to subsequent or
future loans. The Court did not therefore reach the question of unconscionability,
but it did comment as follows:
A cynic might argue that, given the desperation of
people who take out payday loans, these plaintiffs would
have signed anything, so that relieving them from the
duty to arbitrate gives them a windfall based on an
oversight by Instant Cash. The defendants do not make
this argument, however, perhaps fearing that it would
invite a conclusion that payday loans are unconscionable
and therefore unenforceable even in states that do not
deem them usurious.
Id. at 778.

Finally, Valued Services argues that the trial court’s decision is not
supported by the case law on which it purports to rely. Valued Services notes that,
of the three cases cited by the trial court (Conseco Finance Servicing Corp. v.
Wilder, 47 S.W.3d 335 (Ky. App. 2001), Hill v. Hilliard, 945 S.W.2d 948 (Ky.
App. 1996), and Anthem Health Plans of Kentucky, Inc. v. Academy of Medicine of
Cincinnati, 2004 WL 2413666 (2003-CA-000752-MR; 2003-CA-000753-MR;
2003-CA-000754-MR) (Ky. App. 2004)), none stand for the proposition that an
arbitration provision that provides for arbitration of matters other than those arising
directly from the underlying contract is unconscionable.

Conseco provides the fullest discussion in our case law of the doctrine
of unconscionability as it relates specifically to arbitration agreements, and the trial
court did not therefore err in relying on it. Simply because the Conseco court
focused on different grounds for finding unconscionability than those raised here,
and concluded that the agreement at issue was not unconscionable, does not mean
that the opinion was irrelevant to the trial court’s analysis in this case.
In Hill and in Anthem, the doctrine of unconscionability was never
invoked. Both cases stand for the proposition that it is within the power of the
courts to delineate the scope of an arbitration provision. In Hill, it was held that
claims for sexual assault and battery, intentional infliction of emotion distress, and
false imprisonment were not within the scope of an arbitration agreement which
was confined to “[a]ny controversy . . . arising out of employment or termination
of employment[.]” Hill, 945 S.W.2d at 950. In Anthem, this Court upheld the trial
court’s ruling that the antitrust claims of a group of physicians against an insurance
company were not subject to arbitration because they fell outside the scope of the
arbitration agreement, which applied to “any disputes arising out of or relating to
the provider agreement or business relationship.” It did so on the ground that the
antitrust action could be maintained without reference to the provider agreement or
the business relationship.

Valued Services argues that the Anthem court erred in looking beyond
the language of the arbitration provision to the underlying contract. Valued
Services further appears to contend that, if we affirm the trial court, we would in
effect establish a rule that a claim, in order to be arbitrable, must always relate to
the underlying contract. That is not our intention. Although there is no
requirement under Kentucky law that claims must relate to the underlying
transaction in order to be arbitrable, the nature of the underlying transaction may
certainly be considered in assessing whether an arbitration agreement is
unconscionable when applied to a particular set of facts. In this case, the
arbitration provision is unconscionable because it encompasses an intentional tort
with so little connection to the underlying agreement that it could not have been
foreseen by Watkins when he signed that agreement.

For the foregoing reasons, the order of the Fayette Circuit Court
denying the motion to compel arbitration is affirmed.
ALL CONCUR.
BRIEFS FOR APPELLANTS:
Sasha Y. Wagers
Lexington, Kentucky
Mark R. Overstreet
Frankfort, Kentucky
BRIEF FOR APPELLEE:
Debra Ann Doss
Lexington, Kentucky

We like this. $300 does not go far today. Plus, the payday loan customer typically leaves with $255 rather than $300 because the fees are taken out first.

Of course, SFGate.com gets the conclusion wrong! They’re against the Bill. No surprise! They’re lucky enough to have never needed a small micro-loan to survive.

What SFGate.com said: “Existing regulations limit payday lenders to loaning customers $300 at a time. AB377 would raise that to $500. The more money the lenders can hand out, the more of that 459 percent (interest) they can collect. This clearly isn’t about the customers - there hasn’t been any groundswell of demand from payday loan customers. Why on earth would (author Assemblyman Tony) Mendoza want to saddle this state’s most cash-strapped citizens with more debt? Even more insidious is a provision in the bill that would extend regulations to Internet payday-loan providers. Internet payday lending operates in a legal gray area in California - many are unlicensed and flout the rules. This paves the way for their legitimization.” - Editorial, June 17, 2009

You want to know who your customer is? Still trying to figure out who uses payday loans, why they use them and what they really want?

A most interesting payday loan survey is now available! It was sponsored by the Government of Alberta, Canada. It reveals some great insight into the wants and needs of the following respondents to the survey:

• individual consumers and consumer organizations;
• payday loan businesses;
• credit counselling agencies;
• “other stakeholders.”

(Our Thoughts: Don’t let the fact that this survey was conducted in Alberta, Canada cause you to dismiss it as having little relevance to your situation. We have access to multiple studies in various locales and the conclusions are very much the same. Micro-lending consumers are similar throughout the world. And micro-lending products, like the payday loan, car title loans, and pawn services will continue to be in great demand as long as consumers breathe. Government cannot legislate our product out of existence nor will the so-called “consumer protectionists” ever reach into their own product to help an anonymous consumer in need!)

Leger Market Research Company, the firm hired to perform the survey, listed the folowing conclusions. These HIGHLIGHTS are insightful as there are some surprising conclusions to be drawn from their results.

SURVEY RESULTS

User Satisfaction with Payday Loan Lenders
The majority of payday loan users are satisfied with their most recent payday loan experience,
including 49% who are very satisfied. Users are highly satisfied with the rates and terms being
explained to them (82%) but their satisfaction with the cost of the payday loan is substantially lower
(54%).

(Our Thoughts: Why can’t the so-called consumer protectionists who continually attack the payday loan industry GET THIS THROUGH THEIR THICK SKULLS!)

Motivations for Using Payday Loans
Users cite a range of situations of great need, or emergency situations in general, as their reasons for needing payday loans. The most frequently mentioned reason for needing a payday loan is to pay bills or prevent overdue bills (40%).

When asked for top of mind reasons for choosing a payday loan instead of another form of lending, users say it is a last resort (41%). Convenience factors represent other motivators for obtaining payday loans; for example, that it is easy to apply (12%), faster to get the loan (10%) and the location is convenient (6%). However, when asked to rate the importance of a number of specific aspects of payday loans, users rate speed, ability to borrow a small amount, hours of operation, convenient location, and ease of applying for the loan substantially more important (87-92% important ratings) than being the only place they are confident to apply (61%) or not being approved at other places (44%).

(A number of other studies of our industry have consistently pointed out the same thing; IT”S ABOUT CONVENIENCE!)

STIGMA
There is a degree of
stigma associated with payday loans, with 25% of users agreeing they would be concerned about
being seen at a payday loan store.

INTERNET PAYDAY LOANS
A low percentage of users obtain their loans through the Internet (3%). Almost all users obtain their loans from a payday loan store, usually somewhat or very close to their home. Most users (82%) have Internet access, at about the same incidence as the general population (84%).

(OUR THOUGHTS: Only 3% of payday loan users have used the Internet to get a payday loan and yet 25% of users admit to being concerned about being seen in a payday loan store. This is further evidence that those of us offering payday loans should implement the Internet for our product offerings and, we suspect, strive harder to deliver peace of mind to those payday loan consumers contemplating the use of the Internet to get a loan.)

FOCUS GROUPS
Users believe that payday loans serve a need because they allow for emergency loans to consumers who cannot obtain alternative financing. However, users and non-users alike are in favour of regulating the following areas to eliminate unfair or predatory practices:
1. a limit to the allowable cost of borrowing and, to a lesser extent,
2. making agreements easier to understand,
3. allowing a “cooling off” period during which the loan can be cancelled without penalty,
4. allowing the borrower to repay only the principal amount borrowed if the business violates the
regulations,
5. the practice of “discounting,” and
6. rollover loans.

Payday loan users acknowledged that they are under financial hardship and have poor budgeting skills. They also appeared to have little comprehension about the actual cost of borrowing from payday lenders when all of the rates and fees are converted to an annualized percentage rate.

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Characteristics of Payday Loan Users
The payday loan users participating in the survey demonstrated a higher than average likelihood to be between 25 and 35 years of age (35% vs. 18% of the Alberta general population) and a lower likelihood of being under 25 (6% vs. 14%) or 65 years and over (5% vs. 14%). Reflecting their ages, 46% of users report having children in their household under 18 years of age, versus 39% in the general population. Users’ annual household incomes are below average, with 37% having incomes between $20,000 and $49,999 per year versus 23% for the general population.

Use of Payday Loans
The study estimates that 3% of Albertans have ever taken a payday loan. Another study Leger
Marketing conducted in December 2008 provided an estimate of 6% based on a sample size of 900 respondents (+1.6 percentage points, 19 times out of 20).

(The potential for HUGE growth remains for the payday loan product.)

The vast majority (93%) of non-users rate themselves unlikely to consider a payday loan. Supporting this view, most Albertans would not need a payday loan if they needed $300 in cash, as they tend to have access to funds from their bank accounts, relatives, lines of credit, overdraft protection and cash advances.

Non users are more confident than users about being able to obtain the funds they need
through their bank account or through a line of credit, while users and non users demonstrate similar levels of confidence about getting the required funds from other sources.

Albertans who have had a payday loan before tend to be repeat users (79%), using payday loans an average of four times in the past. However, only 22% anticipate using payday loans again in the future.

Users perceive that they pay their loans off as soon as they are due (80%) and only use
payday loans as a last resort (62%). Some users see themselves using payday loans at certain times of year (20%) and 10% use payday loans as part of their regular banking.

Payday loans most frequently involve obtaining between $200 and $499 (52% of users’ most recent loan value), and the amount is almost always under $1,000 (88%).

Payday Loan Agreements
While almost all payday loan users (92%) report having received a copy of their payday loan
agreement, only 66% read the loan agreement before signing.

(We would bet the percentage of payday loan consumers who actually read their contract EXCEEDS those homebuyers who read their loan new documents!)

MAXIMUM RATES

Consumers
Most of the consumers and their advocates said they would prefer, for simplicity’s sake, to see the
maximum rate set as a percentage or dollar amount of the loan. One exception is a senior citizens’
association. This association would like to see the government set a limit of $15 per $100 on the first $300 of the loan, $10 per $100 on the next $500 and $7.50 for any amount above that.

Credit counselling agencies are also in favour of a tiered system. “These loan schemes take advantage of those least able to afford it,” says an outreach program for street people. “If indeed the service is required, then it needs to be better controlled – it is a circle whereby one never gets the loan paid off.”

The Industry
Most payday loan businesses that responded to the public consultation are in favour of a regulated maximum rate.

One payday lender says it opposes interest and fee limits because the current level of competition in the market is healthy and the “normal range” of rates charged in Alberta is consistent with those charged in other provinces. “We believe that a market-based approach to rate-setting is the most effective way of setting rate caps.”

Another industry stakeholder did not say in the discussion paper what rate it would like to see the
maximum set at, it charges interest and fees of as high as $41.50 per $100 based on information
received by regulators or disclosed in writing on disclosure statements to borrowers. In 2006, an
Edmonton television journalist posing as a first time borrower reported he was charged $52.70 per $100.

The stakeholder would like to see the government set a maximum fee as a percentage of the loan, i.e.: $23 per $100 lent. While it does not disclose what rate cap it would like to see set, the $23 figure is consistent with figures it has said publicly that it would like to see charged.

Several small payday lenders said they would like to see the maximum set between $30 and $35.

The payday loan business respondents are unanimous in their desire for some form of industry
regulation, and almost universally in favour of creating this with federally approved legislation. The sole exception is one payday lender in a small Alberta city that prefers regulation without federally approved legislation.

Read the entire report here: Payday Loan Report

It appears the gold rings worn by General Motors workers are no longer highly valued! BusinessDay.com has an article that discusses the “STEADY trickle of gold rings bearing the letters “GM” has found its way into the Main Street Pawn Shop in the heart of the scruffy carmaking city of Pontiac.”

They go on to say that, “GM veterans have been pawning once treasured company rewards in distress or disgust at the state of the biggest American car manufacturer, which is expected to declare itself bankrupt tomorrow.”

“They have such a bad taste in their mouths that they don’t want them,” says Shelby Berger, co-manager of the family-owned shop. Mr Berger says he has handled more than 25 rings since Detroit’s motor industry went into a tailspin.

In a practice long since abandoned, GM awarded the ornaments for sales excellence, loyal service or for graduation from the company’s engineering academy. They now fetch more than $US200 ($A250) each. Mr Berger’s pawn shop is one of the only prospering businesses in Pontiac, a city of 65,000…

Read the Article in full Here: BusinessDay.com ]]> http://paydayloanindustryblog.com/gold-rings-for-cash-gm-bitter-taste/feed/ http://paydayloanindustryblog.com/payday-loans-and-south-carolina/ http://paydayloanindustryblog.com/payday-loans-and-south-carolina/#comments Sun, 24 May 2009 04:01:02 +0000 admin http://paydayloanindustryblog.com/?p=260 Payday Loans and South Carolina

It appears South Carolina has more than a few well informed legislators in their state. Regarding payday loans, both the House and the Senate agreed that there is a huge demand for the payday loan product and that government should allow their citizens to decide which financial product makes the most sense for their individual situation.

Of course the dufasses that think they know what’s best for all of us were up on their high-chairs whinning and crying but thankfully they were shutdown!

We have no complaint that after long debate, the Senate and House agreed on a bill to limit borrowers to one payday loan at a time, a cap of $550, a cooling off period  and the ability of payday loan providers to electronically debit their customer’s bank account. The implementation of a state-wide data base is of little consequence as well.

We’re simply pleased that residents of South Carolina still have access to payday loans and that their legislators “get it.”

Among the series and specials in production and development by History.com comes:

PAWNING HISTORY

It’s one of the oldest forms of banking, and until the 1950’s, it was the leading form of consumer credit in the U.S. Now, the fascinating world and history of the pawn shop is revealed in the new character-driven series, PAWNING HISTORY. The 13 episode long series centers on the only family-owned pawn shop in Las Vegas, where three generations of men — grandfather, father and son — entertainingly clash while running the business together, using their sharp-eyed skills to carefully assess the value of items their colorful customers bring in, objects ranging from the obscure to the truly historic. 13 episodes; Produced by Leftfield Pictures.

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The Center for Responsible Lending has attacked the payday loan industry since time began. They never fail to twist any facts presented to them nor do they hesitate to distort the truth. And as  far as suggestions to alternatives for payday loans they offer only one, so elegantly stated by Jean Fox (CRL Director of Financial Services) at Rep. Guiterrez’s hearings on the payday loan industry, “Payday loan consumers should simply ask their friends and family for financial help.”

A review of data revealed by Veritec provides ample ammunition for arguing against the propaganda spit out by The CRL. The only problem is that The Center for Responsible Lending has gotten very good at interpreting this data to support their anti-business leanings.

The Center for Responsible Lending distortions have become so ridiculous that it prompted Veritec to issue a White paper analysis refuting the misinterpretations made regarding Veritec’s data.

THIS IS SOME GOOD STUFF!!! HANG IN THERE!

If you care about the micro-lending industry (payday loans, pawn, check cashing, car title loans…) you have got to educate yourself and be ready to intelligently defend your business.

The following is a press release issued by Veritec originally appearing here:
http://www.prnewswire.com/cgi-bin/stories.pl?ACCT=104&STORY=/www/story/04-08-2009/0005002727&EDATE=

Following is Veritec’s statement.

We bring this to you because each of us must do our little bit to intelligently defend our industry. You need solid, accurate information.

So here it is…

Congressional Hearings Confirms That States are Doing a Good Job at Regulating Short Term Lending

JACKSONVILLE, Fla., April 8 /PRNewswire/ — A House Financial Institutions and Consumer Credit Subcommittee hearing held April 2, 2009 for H.R. 1214, the Payday Loan Reform Act, included testimony
about the effectiveness of state payday lending regulation. The testimony emphasized that some states have chosen to strictly regulate short term lending, while other states have simply attempted to ban payday loans by implementing limits on fees based on an annual percentage rate.

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“Several states, including Florida and Oklahoma, are effectively protecting consumers,” said Thomas Reinheimer, CEO of Veritec Solutions of Jacksonville, Florida. “Veritec is at the forefront of implementing effective regulatory enforcement solutions for strong consumer protections required by state law. We see first-hand the impact of good regulation in enabling access to short-term credit while protecting consumers from getting trapped in a downward debt-cycle.”

Unfortunately, certain consumer advocacy groups blindly seek to ban availability of short-term credit without full consideration that their actions limit consumer choice. This near sighted approach often results in consumer usage of un-regulated products such as off-shore Internet loans. Reports published by Veritec, based on millions of actual loan transactions, contradict many assertions made by these consumer activists.

“The hearing provided a clear presentation of the product, how it works, the potential abuses, and what has been effective in addressing potential abuses that occur in the industry. State regulatory data based on millions of actual loan transactions in Florida and Oklahoma, two states that have effectively eliminated
multiple loans and rollovers, clearly demonstrates that short-term lending can be regulated effectively,” said Mr. Reinheimer.

Veritec has published detailed white papers and reports about effective regulation of the payday loan industry, available at www.veritecs.com, that illustrate the following facts:

* Borrowers and lenders are unable to roll-over payday loans in Florida and Oklahoma.
* Over 75 percent of borrowers pay-off their loans within 2 days after the due date.
* Grace periods and repayment plans are available under state law to any eligible borrower who can not  pay off their loans on time.
* Over 25% of borrowers no longer use the product more than one year and a majority of borrowers no longer use the product after 3 years.

A recent press release issued by the Center for Responsible Lending (”CRL”) distorts the truth about consumer protections in Florida and Oklahoma. State law prohibits roll-overs in Florida and actual data from millions of loans conducted by in Florida clearly shows that borrowers do not roll-over their loans. Despite these publicly available facts, CRL continues to disseminate erroneous information. “I simply do not understand why CRL continues to misrepresent the facts,” said Mr. Reinheimer.

“We are concerned that states considering regulation and enforcement of consumer protections may be swayed by misinformation from CRL. Veritec supports effective regulation of short-term lending that provides borrower access to short-term credit products with enforcement of consumer protections. State bans on short-term credit products often have an unintentional consequence of helping unregulated lenders, such as off-shore Internet lenders, by eliminating a consumer’s option to choose a regulated product,” said Mr. Reinheimer. “To better illustrate this, all anyone has to do is to search the Internet for loans available in rate cap states and see that unregulated, unlicensed activity is alive and well.”

Veritec Solutions LLC is a regulatory services company that manages statewide lender compliance programs in eight states with statewide databases and related limits included in their respective payday lending (aka deferred presentment, deferred deposit) statutes. Veritec helps state agencies regulate lenders through the
management of these programs. Veritec’s primary customers are state regulatory agencies; the firm does not supply any goods or services to the payday lending industry.

SOURCE Veritec Solutions LLC
And here is a link to the 15 page White Paper at their web site:
http://www.veritecs.com/FL_CRL_Request_2008_09_17.pdf

Comment? Question?
Jer@PaydayLoanIndustryBlog.com

I was not very hopeful. The Payday Reform Act (H.R. 1214) outlines so-called “solid consumer protections for 23 states that have weak or nonexistent consumer protections from abusive lenders.” H.R. 1214 focuses on fees charged and the so-called “cycle of debt.”

Generally, when beaurocrats and regulators decide to address the payday loan industry it’s bad news. The result is often less consumer choices will be available for solving short-term financial problems and additional restrictions targeting the payday loan industry.

So… it was with a great deal of trepidation that I watched this hearing. I literally had butterflies in my stomach!

The result? Two hours later I felt great! Except for Maxine Waters and Jackie Speers, the members of the committee GET IT! They even responded to Jean Fox of the CRL with disdain! Her inability to present a thoughtful and realistic alternative to our product completely turned them off!

The real star was Ms. Guiterrez, a payday loan customer; someone who HAS ACTUALLY USED PAYDAY LOANS out of necessity. Ms Guiterrez was BRILLIANT! Reasoned and articulate, she did a great job of explaining the plight of a typical payday loan consumer. It was obvious she impressed the members of the “Subcommittee on Financial Institutions and Consumer Credit.”

Rep. Guiterrez, and the other committee members, continually focused on what alternative products exist to fill the void should the payday loan product go away. And the answer each time? SILENCE!

There were several industry representatives present who did a great job as well. We congratulate CFSA for stepping up to the plate and defending our industry vigorously!

We’ll come back to this event in the coming weeks for further analysis. Stay tuned!

PR: wait… I: wait… L: wait… LD: wait… I: wait… wait… Rank: wait… Traffic: wait… Price: wait… C: wait…