By RYAN J. FOLEY
MADISON, Wis.

Payday lenders cannot require customers to give up their right to file or join class action lawsuits in order to receive loans, a Wisconsin appeals court ruled Tuesday.

Such requirements, often in fine print on loan agreements, are unconscionable and violate the Wisconsin Consumer Act, the Wausau-based District 3 Court of Appeals found. Class action lawsuits deter businesses from engaging in unfair practices and are "often the only effective means of vindicating consumer rights," Judge Michael W. Hoover wrote.

"Absent a mechanism for class proceedings, many consumers are unlikely to realize they have been wronged because they do not know the defendant's conduct is illegal," he wrote.

The waivers have been standard in contracts across the payday lending industry to limit exposure to damages and remedies for consumers, said consumer rights attorney Eric Crandall of New Richmond. He said the ruling gives consumers more power to join together to fight high interest rates.

"Payday lenders know they are involved in a very unseemly business," he said. "The damages awarded in a class action could easily annihilate a payday lender, destroy the business, eliminate it. One of the efforts to stop that has been a class action ban."

He said he believed the lenders, which offer short-term loans at high interest rates, would immediately rewrite their contracts to remove such language.
Starting Dec. 1, payday lenders must limit loans to $1,500 or 35 percent of a borrower's income, whichever is less, and allow customers to roll over loans only once under a bill signed last week by Gov. Jim Doyle. Lawmakers passed the rules to stop what they called abusive practices after the industry grew for years with little oversight.

Doyle used his partial veto power last week to strengthen consumer protections by banning postmaturity interest on loans and closing a loophole that would have allowed loans offered for 91 days or longer to escape regulation. He also banned auto title loans, among other changes.
Crandall represented Darcie Estes, who borrowed more than $1,400 from The Cash Store in Hudson to try to pay her mortgage and other bills. She ended up paying back more than $4,500 because the loan had 521 percent annual interest.
Estes defaulted on the loan still owing $1,000 and lost her home in Elmwood to foreclosure. The store's owner, Cottonwood Financial LTD, went into small claims court in 2007 to collect the balance and court costs.
Estes filed a counterclaim alleging the interest rate and other terms violated the Wisconsin Consumer Act and seeking damages and attorneys fees.

A Pierce County judge awarded Cottonwood $1,800 and dismissed the counterclaim, saying it was prohibited by the loan agreement in which she waived her right to a jury trial, to participate in class action lawsuits and seek other remedies. Under the deal, all disputes are to be settled through arbitration.

The appeals court sent the case back Tuesday for further proceedings to determine whether the agreement is unenforceable. Crandall said he was confident it would be thrown out since the wording was in fine print and was never read to his client, which would pave the way for the merits of the lawsuit to proceed.
Duffy Dillon, a lawyer for Irving, Tex.-based Cottonwood, said he was reviewing the decision and had no immediate comment.

Cottonwood hired four lobbyists, including the former director of the state Senate Democrats' campaign committee, to try to shape the new regulations, disclosure records show. Two Cottonwood executives and one of its lobbyists showered more than $12,000 in campaign contributions on lawmakers in the final months of 2009.