Crooked Arbitrator Is No Shield for Payday Lender

MANHATTAN (CN) — For consumer-protection advocates this year, there have been perhaps no greater archvillains than payday lenders and consumer arbitrators, and the Second Circuit dealt significant setbacks to both on Monday.

The ruling advances a federal class action filed by Deborah Moss, a New Yorker who sued two out-of-state banks three years ago for saddling her with a 30 percent interest rate on a $350 loan.

More than 19 million U.S. households, or nearly 1 in 6, have accepted similar terms to these, but a growing number of states have banned payday lending for keeping the poor trapped in a spiral of debt.

New York is one of the 18 states that prohibits predatory loans as usury, but its online industry keeps drawing desperate people from across state lines. The banks that lured Moss — First Premier Bank and Bay Cities Bank — operated in South Dakota and Florida, respectively.

Moss had logged on to oneclickcash.com in 2010 when she signed her name electronically to a clause that said she would resolve any dispute before the Minnesota-based National Arbitration Forum (NAF).

As it happened, Minnesota Attorney General Lori Swanson had shut down NAF's consumer-arbitration business a year earlier.

Saying the company had hid its ties to the collection industry and stacked the deck against debtors, Swanson brought charges for fraud, false advertising and deceptive-trade practices.

After Moss sued over her loan in 2013, the banks insisted that their arbitration clause still applied, and they asked U.S. District Judge Joseph Bianco to appoint a different arbitrator.

Bianco rejected that request last year, and the Second Circuit affirmed that ruling today.

"The arbitration agreement in this case contains numerous indicators that the parties contemplated one thing: arbitration before NAF," U.S. Circuit Judge Rosemary Pooler wrote for a three-person panel.

Since NAF is permanently out of the consumer-arbitration business, the banks must face their class-action lawsuit in the Eastern District of New York.

Attorneys for the banks and debtor-class did not immediately respond to email requests for comments.

Meanwhile, the ruling against a Florida-based bank could have political reverberations one day before a significant congressional election there.

Rep. Debbie Wasserman Schultz, who recently resigned as head of the Democratic Party following the release of embarrassing emails by WikiLeaks, faces a stiff challenge for her congressional seat from Tim Canova, a law professor who has attacked her for her past support of payday lenders.

"After taking hundreds of thousands of dollars from Goldman Sachs and other Wall Street banks, she has voted to prevent the Consumer Financial Protection Bureau from regulating payday loans and addressing racial discrimination in car loans," Canova wrote on his website in March.

Politifact ranked that statement "Mostly True" weeks later, and continuing pressure caused Wasserman Schultz to drop her former opposition to tougher regulation of the industry.

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