Aside from a smoky pool hall with its visible collection of baseball bats, payday loans are the next worst form of consumer lending. But, payday loans promise easy credit in a pinch. Friendly websites, fast talking, and a faux concern for a person’s financial well being makes even the Pied Piper blush. Even celebrities are involved in the song of payday loans.
Payday Loans Cause More Problems Than They Solve
The consequences of payday loans are catastrophic. Reminded by a recent court order obtained by the Federal Trade Commission (FTC) against some payday lenders, payday loans are abusive. According to the Center for Responsible Lending, a recent study found that consumers who borrowed payday loans almost doubled the chance of having to file for bankruptcy. The study documents an irony considering that some payday loans are promised as a means of avoiding bankruptcy.
While most of the consequences of payday loans are legal (and anticipated in the fine print), some payday lenders are inspired by their brazen, bat-wielding brethren. Take for instance the collection of payday loans whose lenders were too busy for the formalities of court. The payday lenders collected the payday loans through wage garnishments. However, instead of suing, getting a judgment and a writ of execution, and then a wage garnishment order, some payday lenders just jump to the end.
Tens of thousands of dollars were garnished from careless employers tricked by “wage assignment clauses” found in the agreements for payday loans. Add some fast talk and legalese, and just about anyone can convince an employer to turn over wages.
True, sometimes wages can be garnished without a court order, but only in very limited circumstances. Money owed to the federal government and other special carve-outs like student loan and child support collections enjoy this court-less exception.
Wages Cannot Be Garnished for Payday Loans Without a Court Order
In a rare example of the actually suing to stop the illegal collection of payday loans, the FTC obtained a court order against Joe S. Strom and his payday loan companies, LoanPointe, LLC, Eastbrook, LLC, Ecash, and Getecash. The FTC court order restrains Strom and his companies from deceptively stating important lending terms such as applicable interest rates, amounts actually borrowed, and other facts about payday loans. The court prohibited illegal collections, too. Ordered to repay nearly $300,000 in restitution, hopefully, the FTC’s actions will deter other payday lenders from collecting payday loans in an illegal manner.
Equally important for reigning in the payday lending industry as a whole, the court held that a “wage assignment clause” found within payday loans are an illegal contract term that tricked lenders into garnishing their employees’ paychecks without authorization. The FTC’s court order reiterates that payday loans cannot inconspicuously insert wage assignment clauses into consumer contracts and hope to capitalize on employers who should know better. In fact, no one can.
The FTC’s Credit Practices Rule bans wage assignment clauses in consumer contracts though there are a few exceptions.