Payday lenders use law to seek more damages

Friday, March 4, 2005 | 4:57 a.m.

WEEKEND EDITION

March 5 - 6, 2005

A 56-year-old Las Vegas card dealer had bad credit and a gambling problem. Medical bills were piling up. Going to one payday lender wasn't enough.

He wound up getting loans from seven different companies, paying $700 a month in interest.

"It got to the point where I couldn't live like that so I stopped paying them," he said.

The man, who requested anonymity, sought credit counseling, but one company refused to negotiate his $959 debt. When the company sued him in Las Vegas Justice Court the amount it sought in damages was $2,861, nearly three times what he owed.

"They did treble damages," he said. "I never heard of that before."

Chapter 604 of the Nevada Revised Statutes allows payday lenders to collect up to $50 in penalties from customers for checks that cannot be cashed because of insufficient funds. Lenders also may collect the prime rate plus 10 percent in interest on defaulted loans.

But many payday lenders who have sued customers also seek treble damages under another state law that allows Nevada merchants to recoup triple the amount of a check returned for insufficient funds, up to $500 per check.

Assembly Majority Leader Barbara Buckley, D-Las Vegas, said the lenders are using the bad check law illegally.

Check City owner Jim Marchesi, who is also president of the payday lenders trade group Nevada Financial Services Association, agreed with Buckley, as does Paul Ashworth, a supervisory examiner with the Nevada Financial Institutions Division.

But Las Vegas attorney Sean Hillin, who has filed many of those lawsuits on behalf of payday lenders, defended the use of the bad check law. Hillin does not believe that the Chapter 604 provision that restricts lenders to a maximum of $50 in fees for returned checks prevents them from also seeking treble damages, especially in cases where the customer knows he won't be able to pay back the loan.

Without the ability to sue for treble damages, Hillin predicted that most of the smaller lenders would go out of business.

Still, the financial institutions division issued a memo to payday lenders in July 2002 that reminded them that they shouldn't be using the bad check law to sue customers.

The Nevada Assembly attempted clarification in 2003 when it unanimously approved Assembly Bill 433, which would have prevented payday lenders from using the bad check law. But the bill died in the Senate, something Hillin says confirms his belief on treble damages.

Buckley, who as executive director of Clark County Legal Services has helped borrowers fight such damages, is attempting to change the law.

Under her proposal, lenders could not sue for triple damages under the state's bad check law. And lenders would be liable to the customer for actual and punitive damages as well as state penalties of $1,000 for each violation of the law.

"The penalties," she said, "would give them the financial disincentive not to violate the law."