Randall Chase

Associated Press

DOVER - A Delaware judge has ruled in favor of a former hotel housekeeper who sued a consumer loan company that demanded repayment of $1,820 for a $200 loan, a loan agreement the judge declared “unconscionable.”

Monday’s ruling by Vice Chancellor J. Travis Laster involved a loan that Gloria James of Wilmington took out in 2013 to pay for food and rent. James, who was earning $11.83 an hour as a part-time housekeeper at the Hotel DuPont, went to a storefront business called Loan Till Payday. It is run by National Financial LLC, a Utah company that specializes in small-dollar, high-interest loans.

She obtained what the business called a Flex Pay Loan, requiring her to make 26, biweekly, interest-only payments of $60, followed by a final payment comprising both interest of $60 and the original principal of $200. The total repayments added up to $1,820, equating to an annual percentage rate of more than 838 percent.

“That level of pricing shocks the conscience,” wrote Laster, who said the loan could be rescinded because it was “unconscionable.” He also concluded that National had violated the federal Truth in Lending Act.

James, who broke her hand while cleaning a toilet the day after getting the loan, made her first interest payment but wound up missing work and defaulting on the loan. According to court records, James, who had obtained five previous short-terms loans from National, said she did not fully understand the disputed loan agreement and thought she would have to pay back only $260.

After the General Assembly imposed limits on payday loans in 2013, National recast its payday loans as installment loans designed to remain outstanding for seven to 12 months, the judge noted.

“The Payday Loan Law only applied to loans designed to be outstanding for sixty days or less, so by making this change, National sidestepped the law,” Laster wrote in a 72-page ruling.

The 2013 law did not cap interest rates for payday loans, but instead targeted frequent rollovers, which often leave borrowers trapped in a cycle of debt. The law limits borrowers to no more than five payday loans of $1,000 or less in a 12-month period, and lenders to no more than four rollovers of an existing payday loan.

Rick Cross, an attorney for James, said the industry responded by recasting short-term payday loans as longer-term, installment loans with interest-only payments for a year.

“What you’re effectively doing is rolling it over every pay period into a new loan,” he said. “The industry has generally extended the length of the payday loan to get around the short-term nature that characterizes the loan.”

The result is that the loan agreement signed by Jones carried an APR of 838.45 percent. Using the company’s planned repayment schedule, the APR was actually 1,095 percent.

Laster noted that the courts are wary of second-guessing contracts that have been voluntarily entered into by both parties.

“But as with many areas of the law, there are countervailing principles that prevent an indisputably important and salutary doctrine from operating as a tyrannical absolute. One such ground is unconscionability, traditionally defined as a contract ‘such as no man in his senses and not under delusion would make on the one hand, and no honest or fair man would accept, on the other,’ ” Laster wrote, citing previous court rulings.

Cross said Monday’s ruling was a good first step that could lead to further lawsuits, or to broader action by state officials.

“The target customers that these companies have are typically folks that are financially unsophisticated and usually in a financial hardship,” Cross noted.

Attorneys for National Financial, who were sanctioned by Laster in 2014 for not complying with a court order regarding document production, did not return an email seeking comment.