By Michael Kind, Esq., Guest Blogger

With over two times as many payday loan stores than there are casinos, you’ll find a payday loan storefront at almost every major intersection in Las Vegas.  The payday loan industry in Nevada is about a half a billion dollars a year.   This post provides a general overview of the current version Nevada’s payday loan statute, NRS 604A.

     Payday loans are intended to fill a short-term need.   But because of the high interest rates, borrowers sometimes wind up stuck in a debt spiral from which they can’t escape.  Given the costly interest rates, a $200 loan could easily end up costing upwards of $1,000.  Many payday loan borrowers are repeat customers, taking out an average of eight loans a years.  Some say as many as 80% of borrowers take out additional loans to pay back previous loans or to cover expenses shortly after their money is spent to pay back another loan.   It has been highly reported that payday loans significantly contribute to a long-term debt trap—the debt treadmill.  In this way, payday lenders depend on people’s inability to afford their loan and their need to take out additional loans, resulting in more fees to the lender.

     Although the average payday loan is only about $350, payday lenders in Las Vegas file hundreds of lawsuits on these loans every month.  It is not uncommon for lenders to file suit in Nevada for as little as $300-$500.  Such lawsuits are possible because payday lenders’ attorneys have written contracts under which they are entitled to an award of attorney fees if they prevail in court.

     These lawsuits often result in a default judgment against the borrower.  Borrowers usually do not know how to defend themselves and many times don’t even know they were sued.  Recently, Judge Gonzalez approved a class action settlement involving one of the state’s largest payday lenders after it was discovered that the payday lender obtained unlawful default judgments against about 14,000 Nevadans.  The default judgments were secured using fraudulent affidavits of service, even though the lawsuits were never served on the borrowers/defendants.

     When being pursued by a payday lender, it is important to be familiar with the applicable laws and possible defenses.  If the payday loan was unlawfully made, the loan may be unenforceable and the borrower may likely also be entitled to damages.

Types of loans

     There are generally three kinds of loans made by payday lenders: high-interest loans, deferred deposit loans, and title loans. For a deferred deposit loan, the lender gives cash in return for a postdated check (or authorization to make an automatic withdrawal from the borrower’s bank account) that the lender will cash on that later date.

      A high-interest loan includes any loan that has an interest rate of more than 40%, and upwards of 400%.  These loans could include single-payment arrangements but usually consist of multiple installment payments.

     A Title Loan is a loan that has an interest rate of more than 35 percent that is secured by the borrower’s car title to secure the loan.  If the borrower fails to timely pay back the loan, the lender can repossess and sell the vehicle.

Restrictions on payday lenders

     According to the Center for Responsible Lending, Nevada has “no meaningful regulation of payday lending.”   There is no cap on to how much interest lenders can charge.  Among the highest in the country, the average interest rate in Nevada is a whopping 652% (the national average is around 400%).  However, payday loans in Nevada are not wholly without limits.

Limits on payday loan amount

     For Deferred deposit loans, the loan must not exceed 25 percent of the borrower’s expected gross monthly income. In the case of high-interest loans, the amount of any monthly payment must not exceed 25 percent of the borrower’s expected gross monthly income.  This requirement is cumulative and caps the sum of the monthly payments on all outstanding loans from a single lender.

     In addition, payday lenders are required to determine the borrower’s reasonable ability to repay the loan. Specifically, lenders need to consider the borrower’s expected income, employment status, credit history, and other factors, against the terms of the loan. Lenders may not consider the ability of any other person, such as a spouse or a friend, to repay the loan.

     When it comes to title loans, the loan may not exceed the fair market value of the vehicle securing the loan. Furthermore, lenders must assess the borrower’s reasonable ability to repay the loan, just like with high-interest loans. The vehicle must be legally owned by the borrower and if the vehicle has more than one legal owner, lenders cannot use that vehicle to issue a title loan.

Limits on amounts collected

     For high-interest and deferred deposit loans, a lender may sue a borrower who defaults on the loan. In a collection suit, a lender is limited to collect only the unpaid principal and interest, plus statutory interest not to exceed 90 days.  The lender may also collect up to two $25 fees for checks that were returned for insufficient funds.  The sum of all interest and fees may not exceed the principal amount of the loan.

     The lender may also seek to collect court costs, nominal service of process costs and reasonable attorney fees. Nevada law prohibits collection of any fees or costs not specifically authorized by statute, including origination fees, set-up fees, collection fees, transaction fees, negotiation fees, handling fees, processing fees, late fees, default fees or any other fees, “regardless of the name given to the fee.” See NRS 604A.5058.

     When a borrower defaults on a Title Loan, the only remedy for the lender is to repossess and sell the vehicle. The borrower is not normally responsible for any deficiencies. The lender must give the borrower the opportunity to retrieve any personal belongings in the vehicle. The lender may not sue the borrower unless the borrower committed fraud. For example, if a borrower takes out a title loan secured by someone else’s car, the lender may sue to enforce the agreement as well as for attorney fees and costs.

Limits on the loan period and grace periods

     High-interest loans are normally limited to 35 days. But when the loan is an installment loan, it may be made for a term of up to 90 days.  Deferred deposit loans are strictly limited to 35 days. Borrowers have a right to an extended payment plan of up to 90 days but the lender may not charge any additional interest or fees to a borrower to enters into an extended payment plan.

A title loan must generally not exceed 30 days. However in some circumstances, the loan may be made for a term of 210 days. In those cases, the lender may not extend the loan for a longer period.  In all cases, for borrowers who default on their loan, the lender must offer a repayment plan. The lender may not charge a borrower any additional interest or fees for entering into a repayment plan.

Debt rollovers

     When rolling over debt, the length of the loan is extended, usually for a fee. According to a study in The Journal of Consumer Affairs, people who live in states that permit three or more rollovers were more likely to use payday lenders and pawnshops to supplement their income. Payday loan rollovers lead low income individuals into a debt-cycle where they will need to borrow additional funds to pay the fees associated with the debt rollover.  Of the states that allow payday lending, 22 states do not allow borrowers to rollover their debt and only three states, including Nevada, allow unlimited rollovers.

     Nevada allows lenders to extend the loan period by making a second loan and using the proceeds to pay back a previous debt. Such loans come with a catch for lenders, however.  In State Dep’t of Bus. & Indus. v. Dollar Loan Ctr., Ltd. Liab. Co., 412 P.3d 30, 34 (Nev. 2018), the Nevada Supreme Court recently made clear that lenders who offer a new deferred deposit or high-interest loan and use the money to pay back an earlier loan, the lender is barred from pursuing “any civil action or process of alternative dispute resolution on a defaulted loan or any extension or repayment plan thereof.”  When a lender offers a borrower a loan that is used to pay back any amount of a previous loan, the lender is not allowed to sue for that debt.

Disclosures and other requirements

     In addition to the disclosures required by the federal Truth in Lending Act and Regulation Z, payday loans to Nevada consumers must describe every fee charged, regardless of the name given to the fee, in writing, before making the payday loan.  Because Nevada’s payday loan statute incorporates TILA, a violation of that statute or any applicable disclosure requirement could render the loan void and unenforceable. The statute also incorporates the Fair Debt Collection Practices Act so payday lenders are not allowed to make any misrepresentations to borrowers, use any unfair means, contact a borrower who is represented by an attorney or otherwise violate any provision of the FDCPA.

     Payday lenders must be licensed by the Financial Institutions Division. Loans made by people or companies not licensed are unlawful and not enforceable. There is no exception for online lenders.  Borrowers have a right to pay the loan off early, without any penalty. Lenders are also required to accept partial payments. The law provides that when a borrower makes a payment, lenders must provide clear a receipt that must include specific details, including the balance and an itemization of any interest, charges and fees.

     A payday lender who brings a lawsuit to collect on a loan is required to file the action in the justice court for the township where the deferred deposit loan was made. In all cases, a payday lender is not allowed to obtain a confession of judgment or a waiver of any rights from a borrower.

Loans to Military members

     Under the Military Lending Act, interest rates on loans to active-duty servicemembers (including those on active Guard or active Reserve duty) may not be higher than 36%. The Act also provides other significant rights to military members and restrictions on waivers of other rights.

    Additionally, under NRS 604A.5043, a lender is not allowed to garnish (or threaten to garnish) the wages of any military member or the member’s spouse.  Lenders who knowingly violate the laws applicable to military members, are responsible to pay $1,000 per violation in statutory damages, in additional the other damages and remedies that may be available to the borrower.

Effect of an unlawful loan

     The Nevada Division of Financial Institutions is the state agency charged with overseeing and regulating payday lenders. According to its 2018 performance audit, 33% of licensed payday lenders received a less-than-satisfactory examination rating over the last 5 years.  However, advocates’ endeavors to implement regulations have repeatedly failed. For example, during the 2017 legislative sessions, various bills to implement a centralized database tracking system were introduced and considered.  According to the Division of Financial Institutions, a payday loan database would assist lenders to identify whether a borrower is eligible for the loan based on the state’s payday lending laws. Lenders would be able to see, in real time, whether a borrower has any outstanding payday loans through other lenders, thereby reducing the overall default rate.  The system would also help the division to oversee lenders’ activities.

     That the bills failed to pass is no surprise since the payday industry holds significant power over the Legislature. As The Nevada Independent reported, the payday lenders gave over $134,000 to lawmakers ahead of the 2017 legislative sessions, and at least 22 lobbyists were hired during the session to represent various payday lenders.

     Still, under the current payday lending legal scheme, a borrower whose rights have been violated in connection with a payday loan or title loan may bring an action to recover actual and consequential damages, punitive damages and reasonable attorney fees and costs.  In addition, $1,000 statutory damages may be available when the violation concerns military members, disclosure violations, or when the lender attempts to collect unlawful amounts after default. A consumer will not need to prove willfulness in a suit for damages against a lender since NRS 604A provides for strict liability, with only a narrow bona fide error defense.

     Significantly, in addition to damages, a borrower may ask the court to void the loan and render it unenforceable, if the borrower can prove that the lender’s violation was intentional.

Conclusion

     When in doubt, consumers are strongly advised to review their payday loan with a consumer attorney. Many payday lenders have been found to be in violation of the various lending laws in Nevada. Those violations contribute to the increased default rate by borrowers since the laws are designed to protect borrowers from loans they cannot afford.

     Verify that the lender is not attempting to collect unlawful fees or interest. Credit must be given for all payments made by the borrower. The lender must also show that it offered the lender a repayment before a complaint is filed.

   Assess the amount of the loan, compared to the borrower’s income.  Payday loans are usually marketed towards people with low-income and borrowers often fail to repay a loan because they simply could not afford it.  NRS 604A places the burden on the lender to determine the borrower’s ability to repay the loan by calculating the borrower’s expected income at the time the loan is made.  When the lender fails to do so, it shares the risk of default and the loan may be voided under NRS 604A.900(1).

     Before filing a lawsuit, payday lenders often hire third party debt collectors to attempt to collect the debt.  The FDPCA applies to third party debt collectors and prohibits the use of any false, misleading statements and any unfair or unconscionable means to attempt to collect debt.  Debt collectors are not allowed to communicate directly with a consumer when the collector knows that the consumer is represented by an attorney.  Debt collectors are also prohibited from communicating with consumers at inconvenient times or places. Under NRS 604A, the protections of the FDCPA apply equally to any payday lender licensed in the state.  If the lender used unfair or deceptive means in connection with the loan, the loan may be unenforceable.

     Review the loan’s disclosures and whether the loan is a rollover loan. In such a case, the lender is not allowed to file a lawsuit. The terms of the loan must comply with the rules’ requirements.  If the loan’s terms are longer than allowed, the loan is charging illegal interest.  Where repayment plans, extensions or “grace periods” were offered, confirm that no illegal additional interest or fees were charged.  If the borrower is a member of the military, additional protections apply and loans with interest rates over 36% are not legal.

     If the payday lender violated the borrower’s rights, the loan may likely be unenforceable. the borrower might also be entitled to actual damages, punitive damages, statutory damages and attorney fees and costs.

For answers to your questions about pay day loans in Nevada, call Mike