Aug. 14, 2013 – A consumer who borrowed short-term loans at annualized interest rates of 246 and 385 percent says the loans are unconscionable. Recently, a state appeals court asked the Wisconsin Supreme Court to “draw the line.”
In 2010, Timothy Williams borrowed $550 from lender Valued Services of Wisconsin, repayable in one month at an annualized interest rate of 385 percent. Thus, the loan required Williams to pay a total finance charge of $156 if the loan was repaid on time.
A month later, Williams took another loan to pay the first loan. This time, Williams borrowed $706 at a 246 percent. This loan, repayable monthly for a year, required Williams to pay a total finance charge of $1,241 over the one-year life of the loan.
Williams received monthly social security payments of $1,147 but had no other income before borrowing. In March 2011, he filed an action under the Wisconsin Consumer Act, arguing that the loans that were procedurally and substantively unconscionable.
A circuit court ruled against Williams, who appealed. Now the Wisconsin Court of Appeals has certified the case for review by the Wisconsin Supreme Court, which may choose to review the case upon a majority vote of its seven members.
“We again certify to the supreme court the question of where to draw the line of unconscionability for short-term loans with extremely high interest rates,” wrote the court, noting the supreme court never reached the merits of a similar case.
Under Wis. Stat. 425.107(1), courts can void consumer transactions declared unconscionable, based on various factors listed at section 425.107(3).
Williams argues that Value Services’ loans were procedurally and substantively unconscionable because the borrower had far greater power and sophistication to set the loan terms and knew Williams would be unable to repay the loans.
On the contrary, Value Services argues that Williams had opt-out options that preclude finding unconscionability under a prior ruling. That is, Williams could and did opt out of arbitration in the event of default, and disallowed electronic transfers from his account.
Value Services also argues that Wisconsin law does not restrict finances charges, because Wis. Stat. section 422.201(2)(bn) specifically states that “a consumer credit transaction … is not subject to any maximum limit on finance charges.” However, the appeals court noted that the finance charge amount is not the only consideration:
“We think that it is unclear what role a very high interest rate should play in a court’s analysis of unconscionability under the WCA, either in itself or together with other factors,” the court wrote. “Guidance by the supreme court will assist consumer law practitioners and lower courts in resolving disputes over short-term loan interest rates.”