Biting the (Loan) Sharks: Why the Truth in Lending Act Currently Fails in Its Goal to Promote Well-Informed Consumer Credit Decisions, and How Greater Allowance of Statutory Damages May Improve Its Effectiveness

• Author: Thomas D. Lowry
• Position: J.D. Candidate, The University of Iowa College of Law, 2020; M.S., DePaul University Kellstadt Graduate School of Business, 2014; B.A., DePaul University, 2013
• Pages: 827-863

827

Biting the (Loan) Sharks: Why the Truth

in Lending Act Currently Fails in Its Goal

to Promote Well-Informed Consumer

Credit Decisions, and How Greater

Allowance of Statutory Damages May

Improve Its Effectiveness

Thomas D. Lowry*

ABSTRACT: Current state and local payday loan regulations purport to

protect payday loan borrowers through decreasing payday loan presence in

credit markets. These regulations appear to be based on a simple premise:

“How can payday lenders harm consumers if consumers are less able to find

a payday loan?” This Note argues payday loan borrowers are often choosing

to take on such loans because it is the best source of available credit. State and

local regulations, then, too often take away this option and force would-be

payday loan borrowers to even more expensive alternatives, such as bouncing

checks and making late bill payments. The federal Truth in Lending Act

(“TILA”) properly focuses federal regulation not on decreasing the supply of

payday loans in credit markets, but in ensuring lenders provide borrowers

with adequate disclosures related to payday loans. However, TILA currently

provides plaintiff-borrowers with inadequate opportunity to recover statutory

damages for lender violations. Instead, plaintiff-borrowers are often required

to show actual damages. This Note argues that TILA should be amended to

provide plaintiff-borrowers with greater ability to recover statutory damages

through TILA, and provides a legislative suggestion modeled after the

Telephone Consumer Protection Act.

I.INTRODUCTION ............................................................................. 829

II. BACKGROUND OVERVIEW OF PAYDAY LOANS AND THE

CURRENT STATE AND FEDERAL REGULATORY FRAMEWORK .......... 831

A.WHAT IS A PAYDAY LOAN? ...................................................... 831

*

J.D. Candidate, The University of Iowa College of Law, 2020; M.S., DePaul University

Kellstadt Graduate School of Business, 2014; B.A., DePaul University, 2013.

828 IOWA LAW REVIEW [Vol. 105:827

B.OVERVIEW OF PAYDAY LOAN REGULATORY REGIMES ................. 833

C.CURRENT FEDERAL REGULATORY REGIME ................................ 836

1.Truth in Lending Act .................................................... 836

2.Regulation Z .................................................................. 839

3.Consumer Financial Protection Bureau’s Final

Rule, 12 C.F.R. § 1041 .................................................. 840

D.WEAKNESSES IN CURRENT REGULATORY REGIMES RELIANT

UPON DECREASING THE SUPPLY OF PAYDAY LOANS IN THE

CREDIT MARKET ..................................................................... 841

1.Economic Theory Underpinning Price Caps .............. 842

2.State and Local Payday Lending Regulatory

Regimes Broadly Focus on Decreasing the

Supply of Payday Loans in Credit Markets .................. 843

III.THE TRUTH IN LENDING ACT’S OVERLY NARROW

ALLOWANCE OF STATUTORY DAMAGES FAILS TO

PROTECT CONSUMERS FROM PREDATORY LENDERS ...................... 849

A.JUDICIAL CONSTRUCTION OF TILA’S ENFORCEMENT

PROVISIONS ............................................................................. 849

1.The Seventh Circuit Differentiated Between a

Failure to Disclose and Improper Disclosure in

Brown v. Payday Check Advance, Inc., Effectively

Reducing Plaintiffs’ Paths to Statutory Damages

Under TILA ................................................................... 849

2.The Fifth Circuit Found in Favor of Lenders in

Davis v. Werne Because the Court Found No

TILA Violations, but Provided Dicta Supporting

More Robust Availability of Statutory Damages

Under TILA than the Seventh Circuit ......................... 851

3.The Sixth Circuit, in Baker v. Sunny Chevrolet, Inc.,

Joined the Seventh Circuit’s Narrow TILA

Interpretation Regarding Statutory Damages,

Contradicting the Western District of Michigan’s

Decision in Lozada ......................................................... 852

4.The Western District of Michigan, in Lozada v.

Dale Baker Oldsmobile, Found Statutory Damages

Available for Violations of § 1638(b)(1) ..................... 853

B.BROWN, DAVIS, LOZADA, AND BAKER ILLUSTRATE TILA,

AS CURRENTLY WRITTEN, FAILS TO PROTECT CONSUMERS ........ 855

IV. PROPOSED LEGISLATIVE SOLUTION .............................................. 857

A.LEGISLATIVE PROPOSAL: AMEND THE TRUTH IN LENDING

ACT TO ADD A PROVISION SIMILAR TO THE TELEPHONE

2020] BITING THE (LOAN) SHARKS 829

CONSUMER PROTECTION ACT’S STATUTORY DAMAGE

PROVISION .............................................................................. 858

B.POLICY CRITIQUES AND COUNTERARGUMENTS: IN DEFENSE

OF A TILA ENFORCEMENT REGIME THAT ENCOURAGES

CLARITY AND ACCOUNTABILITY IN THE PAYDAY LOAN

MARKET ................................................................................. 859

V.CONCLUSION ................................................................................ 862

I. INTRODUCTION

The payday loan industry conjures up a very negative picture in many

consumers’ minds. As a general matter, consumers likely picture payday loan

shops as only doing business in the poorest neighborhoods. Aside from the

payday loan shops’ location, the businesspeople who run these shops have

similarly poor reputations. To many, the payday loan shopkeeper may be only

one or two steps above organized crime’s loan shark.

The industry is also rife with stories of trapping consumers into “debt

spirals” from which they may only escape at great cost, if at all. In 2016, The

New York Times reported on Candice Byrd’s debt spiral story, providing an

illustrative example of the payday loan industry’s public image.1 Ms. Byrd

initially borrowed a $500 payday loan in 2011 for a car payment, but needed

to continually roll the original loan to finance the debt’s carrying costs.2 After

two years of continually rolling over her payday loan, she lost her car and her

apartment.3 When The New York Times reported Ms. Byrd’s story in 2016, she

had virtually no credit and was forced to complete all transactions in cash.4

Studies suggest the public’s mistrust of the payday loan industry is not

misguided. For example, the Federal Reserve Bank of Kansas City5 has noted

that data “suggest that the bulk of lenders’ profits come from repeat

1. Stacy Cowley, Payday Loans’ Debt Spiral to be Curtailed, N.Y. TIMES (June 2, 2016),

https://www.nytimes.com/2016/06/02/business/dealbook/payday-borrowings-debt-spiral-to-

be-curtailed.html [https://perma.cc/U86N-ZN9R].

2. Id.

3. Id.

4. Id.

5. See About the Fed, BD. GOVERNORS FED. RES. SYS., https://www.federalreserve.gov/

aboutthefed.htm [https://perma.cc/4C7J-F498] (providing an overview of the Federal Reserve

System). The Federal Reserve serves as the United States’ central bank and is responsible for

conducting the United States’ monetary policy as well as conducting research on various issues

important to the American economy. Id. The Federal Reserve has banks in Boston, New York

City, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, Saint Louis, Minneapolis, Kansas

City, Dallas, and San Francisco. Id. Each bank employs economists who conduct research such as

that cited above, Kansas City coincidentally employed economists who researched the payday loan

market. Id.