State v. B&B Inv. Grp., Inc.

Decision Date26 June 2014
Docket NumberNo. 34,266.,34,266.
Citation329 P.3d 658
CourtNew Mexico Supreme Court
PartiesSTATE of New Mexico, ex rel., Gary K. KING, Attorney General, Plaintiff–Appellant, v. B & B INVESTMENT GROUP, INC., d/b/a Cash Loans Now, and American Cash Loans, LLC, d/b/a American Cash Loans, Defendants–Appellees.

OPINION TEXT STARTS HERE

Gary K. King, Attorney General, Karen J. Meyers, Assistant Attorney General, John D. Thompson, Assistant Attorney General, Santa Fe, NM, for Appellant.

Modrall, Sperling, Roehl, Harris & Sisk, P.A., Alex C. Walker, Albuquerque, NM, for Appellees.

CERTIFICATION FROM THE NEW MEXICO COURT OF APPEALS

OPINION

CHÁVEZ, Justice.

{1} In January 2006, two former payday lenders, B & B Investment Group, Inc., and American Cash Loans, LLC (Defendants), began to market and originate high-cost signature loans of $50 to $300, primarily to less-educated and financially unsophisticated individuals, obscuring from them the details of the cost of such loans. The loans were for twelve months, payable biweekly, and carried annual percentage rates (APRs) ranging from 1,147.14 to 1,500 percent. The Attorney General's Office (the State) sued Defendants, alleging that the signature loan products were procedurally and substantively unconscionable under the common law and that they violated the Unfair Practices Act (UPA), NMSA 1978, Sections 57–12–1 to –26 (1967, as amended through 2009).

{2} The district court found that Defendants' marketing and loan origination procedures were unconscionable and enjoined certain of its practices in the future, but declined to find the high-cost loans substantively unconscionable, concluding that it is the Legislature's responsibility to determine limits on interest rates. Both parties appealed.We affirm the district court's finding of procedural unconscionability. However, we reverse the district court's refusal to find that the loans were substantively unconscionable because under the UPA, courts have the responsibility to determine whether a contract results in a gross disparity between the value received by a person and the price paid. We conclude that the interest rates in this case are substantively unconscionable and violate the UPA.

I. BACKGROUND

{3} Defendants market, offer, and originate high-interest, small-principal loans that they call “signature loans,” from retail storefronts in Albuquerque, Farmington, and Hobbs, New Mexico. Signature loans are unsecured loans which require only the signature of the borrower, along with verification of employment, home address, identity, and references. Borrowers take out loans of $50 to $300 in principal, which are scheduled for repayment in biweekly installments over a year. Signature loans carry APRs between 1, 147.14 and 1,500 percent.

{4} Defendants are subprime lenders from Illinois who opened several payday lending operations in New Mexico in the early 2000s because, according to company president James Bartlett, “there was no usury cap” here. Before 2006, Defendants' loan portfolios were predominantly “payday loans” which, like signature loans, are small-principal, high-interest loans. See Nathalie Martin, 1000% Interest—Good While Supplies Last: A Study of Payday Loan Practices and Solutions, 52 Ariz. L.Rev. 563, 564 (2010). Payday loans differ from signature loans primarily in the length of time they take to mature: payday loan terms are between fourteen and thirty-five days, whereas Defendants' signature loans are yearlong. Prior to 2007, when legislation was passed to limit payday lending, payday loans could be rolled over indefinitely, which essentially turned them into medium- to long-term loans that had the effect of keeping the borrower in debt for extended periods of time, similar to the signature loans at issue here. See the 2007 amendments to the New Mexico Small Loan Act of 1955 (Small Loan Act), NMSA 1978, §§ 58–15–31 to –39 (1955, as amended through 2007); see also Martin, supra, at 585–88 (discussing the similarities between signature loans and payday loans).

{5} Defendants converted their loan products from payday to signature loans in Illinois in 2005, after the Illinois legislature enacted its Payday Loan Reform Act. 815 Ill. Comp. Stat. 122/1–1, 1–5 (2005). Defendants also converted their loan products from payday to signature loans in New Mexico just before the New Mexico Legislature implemented extensive payday loan reforms in 2007. See § 58–15–32. Signature loan products are not subject to the restrictions placed on payday loans by the 2007 amendments to the Small Loan Act because they do not meet the definition of payday loans. Compare § 58–15–2(E) (defining installment loan) with § 58–15–2(H) (defining payday loan). By 2008, Defendants no longer marketed payday loans at their stores. Defendants admitted their signature loans “definitely could be a substitute product” for payday loans.

{6} Defendants extend signature loans to the working poor; they lend exclusively to people who provide proof of steady employment but who, by definition, are either unbanked or underbanked. The Federal Deposit Insurance Corporation (FDIC) defines unbanked households as those without a checking or savings account, and underbanked households as those that have a checking or savings account but rely on alternative financial services. Federal Deposit Insurance Corporation, 2011 FDIC National Survey of Unbanked and Underbanked Households, Executive Summary at 3 n. 2 (Sept.2012), http:// www. fdic. gov/ householdsurvey/. The State's expert testified, and Defendants admit, that signature loans are “alternative financial services.” All signature loan borrowers are at least underbanked, and those borrowers without a checking or savings account are unbanked. These borrowers are highly likely to live in poverty: in New Mexico, one-third of all unbanked households and almost one-quarter of all underbanked households earn less than $15,000 per year. 1 Federal Deposit Insurance Corporation, supra, Detailed State and MSA Tables, Appendices H–I, Table H–68, Household Banking Status by Demographic Characteristics: New Mexico at 71. Borrowers' testimony bears out the fact that Defendants target the working poor.

{7} One borrower, Oscar Wellito, testified that he took out a signature loan from Defendants after he went bankrupt. He was supporting school-aged children while trying to service debt obligations with two other small loan companies. He earned about $9 an hour at a Safeway grocery store, which was not enough money to make ends meet, yet too much money to qualify for public assistance. “That's why,” he testified, “I had no choice of getting these loans, to feed my kids, to live from one paycheck to another paycheck.” He needed money for groceries, gas, laundry soap, and “whatever we need to survive from one payday to another payday.” Mr. Wellito borrowed $100 from Defendants. His loan carried a 1,147.14 APR and required repayment in twenty-six biweekly installments of $40.16 with a final payment of $55.34. Thus, the $100 loan carried a total finance charge of $999.71.

{8} Another borrower, Henrietta Charley, took out a loan from Defendants for $200 that carried the same 1,147.14 APR as Mr. Wellito's loan. Ms. Charley, a medical assistant and mother of three, earned $10.71 per hour working thirty-two hours per week in the emergency department of the San Juan Regional Medical Center. She earned around $615 in take home pay every two weeks, while her monthly expenses, excluding food and gas, exceeded $1,000. Ms. Charley's ex-husband would only pay child support “every now and then,” and when she did not receive that supplemental income, she would fall behind on her bills. She needed a loan to buy groceries and gas. Defendants gave her a $200 signature loan with a total finance charge of $2,160.04.

{9} After borrowers brought complaints to the Attorney General, the State sued Defendants under the UPA, which prohibits [u]nfair or deceptive trade practices and unconscionable trade practices in the conduct of any trade or commerce.” Section 57–12–3. Unconscionable trade practices are defined in relevant part as an “extension of credit ... that to a person's detriment: (1) takes advantage of the lack of knowledge, ability, experience or capacity of a person to a grossly unfair degree; or (2) results in a gross disparity between the value received by a person and the price paid.” Section 57–12–2(E). The State identified numerous business practices that it argued were procedurally unconscionable, and alleged that the loan terms were substantively unconscionable. The State sought restitution, civil penalties, and injunctive relief. The State also sued Defendants for violating New Mexico's common law of substantive and procedural unconscionability.

{10} The district court adjudicated liability in a four-day bench trial, and found that Defendants had not violated Section 57–12–2(E)(2), but that they had violated Section 57–12–2(E)(1).2 The district court correspondingly found that the loans were not substantively unconscionable, but they were procedurally unconscionable under common law. The evidence adduced at trial is discussed below.

{11} The State appealed, claiming the district court erred in three ways: first, by failing to correctly interpret and apply Section 57–12–2(E)(2), reading the substantive unconscionability prong in such a way that the section would become meaningless; second, by failing to apply the common law doctrine of substantive unconscionability to the loans; and third, by denying the State's requested restitution. Defendants cross-appealed, claiming the district court erred in determining that the loans violated Section 57–12–2(E)(1), and in determining that the loans violated the common law of procedural unconscionability. The Court of Appeals certifiedthe case to this Court pursuant to NMSA 1978, Section 34–5–14(C)(2) (1972). We accepted certification.

II. STANDARD OF REVIEW

{12} Because the litigation in this case involved a determination...

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