In May 2010, then-Governor Doyle signed 2009 Wisconsin Act 405 into law, effectively regulating “payday loans” for the first time in Wisconsin. The law did not take effect until January 1, 2011. The statute, Wisconsin Statutes § 138.14, defines what a payday loan is, who may operate payday loan business entities, maximum loan amounts, disclosure requirements, and so on. One thing the statute does not regulate, however, is a maximum interest rate for which the creditor may charge. At subsection 10, the statute reads:
(10) Interest, penalties, and fees. (a) Interest. 1. Except as provided in sub. (12)(b), this section imposes no limit on the interest that a licensee may charge before the maturity date of a payday loan.
As a result, in 2011 Assembly Bill 150 was introduced by a number of state representatives to amend the payday loan statute and create a cap on interest rates before the maturity date of the loan at 36%. That bill has stalled in the legislative process, but may resurface at some point down the road. The driving force behind much of this proposed legislation is the debate of whether some interest rates are grossly high and unfair to consumers, or “unconscionable.” The Wisconsin Supreme Court will soon frame the future of this debate, and the constraints within which the legislature will have to work, when it rules in Payday Loan Store of Wisconsin v. Jesica Mount.[1]
This pending case, which began in circuit court, and was certified to the Wisconsin Supreme Court by the Wisconsin Court of Appeals, will consider the issue of whether an annual interest rate in excess of 1000% per year for a short-term loan is per se unconscionable under the Wisconsin Consumer Act (WCA).[2] Before the Wisconsin Supreme Court will be able to determine whether a 1000% interest rate is unconscionable, however, it will have to determine if a court even has the ability to make that decision, or if it is a question better left to the legislature.
The pending case arose after Jesica Mount entered into a number of loan agreements with Payday Loan Store of Wisconsin, Inc. (PLS) for various loans between 2008 and 2009. In July of 2009, she took out a $500 loan, promising to repay $610. Mount failed to make the payments when due and defaulted on the loan. As a result, PLS sued Mount seeking a money judgment on the defaulted loan. Mount answered the complaint and filed a counterclaim asserting, among other things, that the interest rate charged by PLS was unconscionable under the WCA. Mount filed a summary judgment motion. The court granted Mount’s motion, dismissed PLS’s claim, and awarded damages in the amount of $4,001.00, plus attorneys’ fees of $6,610.50, for a total judgment of $10,611.50. The court ruled that the charges added to the loan were unconscionable under the WCA. PLS then filed for appeal and the Wisconsin Court of Appeals certified the case to the Wisconsin Supreme Court stating, “A decision in this case will have statewide impact on consumer credit transactions and provide guidance to lower courts faced with disputes over those transactions.”
The Court of Appeals certification was heavily focused on the issue of “unconscionability.” The WCA addresses unconscionability, stating that in regard to consumer credit transactions, the court may consider a number of factors to determine unconscionability. While these factors describe conditions under which a consumer transaction may be unconscionable, none of the factors specifically address the issue of interest rates, nor does it set specific limits on interest rates. Historically, determining what is “unconscionable” has been difficult for Wisconsin courts as recognized in Bank One Milwaukee, N.A. v. Harris.[3] The Wisconsin Court of Appeals simply noted, “We know unconscionability when we see it,” but was unable to define it. Now, the Wisconsin Supreme Court will determine if there is a specific interest rate at which they “see it.”
One argument that the Court of Appeals did not address or consider in its decision to certify the Mount case to the Wisconsin Supreme Court, though, is the specific statutory language regulating inconsistencies between the payday loan statute and the WCA. Wisconsin Statute § 138.14(13) specifically states that all payday loans shall be governed by chapters 421 to 426 of the Wisconsin Statutes, but where those chapters are inconsistent with section 138, section 138 shall govern. Since a determination by a court regarding the unconscionability of a payday loan interest rate would be in direct conflict with section 138.14(10), it would seem that courts do not have the discretion to make that ruling. The legislature has clearly intended not to limit interest rates on payday loans.
The Wisconsin Supreme Court may soon decide all of these issues, or it may choose to decide only a few of them. One thing that is certain, though, is that the impending ruling in Mount is one that may shape the course of not only payday loan cases in the future, but the entire payday loan industry in Wisconsin. Payday loan companies must be prepared for the possibility of major changes in Wisconsin if the Wisconsin Supreme Court finds that certain interest rates are per se unconscionable.
[1] Payday Loan Store of Wisconsin v. Jesica Mount, 2010AP2298.
[3] Bank One v. Harris, 209 Wis. 2d 412, 563 N.W.2d 543 (Ct. App. 1997).