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Abstract
Reprinted from: Zoë Elizabeth Lees, Payday Peonage: Thirteenth Amendment Implications in Payday Lending, 15 Scholar: St. Mary's Law Review on Race and Social Justice 63 (2012) (196 Footnotes) (Student Comment)
Visit the Predatory Lending Association (PLA) website and one can view its motto: “Helping payday lenders extract maximum profit from the working poor.” The site helps users identify the working poor and explains how the “debt trap” of the working poor may be optimized. While the PLA's website parodies the predatory nature of payday lenders, the humor is unfortunately rooted in the truth.
Payday loans are “small, short-term, triple-digit interest rate” loans that usually range from $200 to $500 dollars. These loans are generally secured by the borrower's post-dated check or debit authorization and are intended to sustain the borrower until payday, when they will pay back the loan in one lump sum on receipt of their paycheck. As of March 2010, “more than 19 million U.S. households had taken out payday loans worth more than $35 billion.” A payday lender's business plan is to build a base of customers who borrow frequently in order to keep up with their loan payments. Payday lenders target people who they believe will have trouble paying off their debt and thus will be repeat customers.
Take for example Sandra Harris, who borrowed $2,510 in separate loans from a payday lender and ultimately paid $10,000 in fees. Ms. Harris said that while it was fast and easy to take out the loan, no one told her “about the bad side . . . [b]ecause they wanted you to come back, that's how they made their money.” Five years after Ms. Harris first went to see a credit counselor she had only one $300 loan to pay off. That $300 loan cost her $1,200 per year in interest. Ms. Harris is the type of person that the PLA facetiously encourages other payday lenders to target; as an African-American woman suffering tough economic times, she is certainly the demographic that payday lenders actually target. Payday lenders disproportionately target minorities and those on the “fringes of the financial system.” The PLA's parody demonstrates what payday lenders are covertly and coercively doing, and in doing so, the PLA exposes the predatory design of payday lenders.
The payday loan industry thrives at the expense of millions of underclass Americans, who are generally defined as those who are economically impoverished and without the means to escape their economic condition, which includes minorities who have been hit the hardest by the current depressed economic climate. In 2011, the stocks of payday lenders soared to record highs as stocks in large banks plummeted. The anemic economic growth in the United States, banks' increasing unwillingness to lend money, and the lack of regulations on payday loans have allowed the industry to thrive. These loans trap the borrower because they are directly connected to the borrower's paycheck. The practice of payday lending and its success in keeping the economically disadvantaged mired in a cycle of poverty raises serious questions under the Thirteenth Amendment, which formally banned slavery, and which applies to modern circumstances sufficiently resembling slavery. Are payday borrowers the modern day peon whose labor is tied directly to paying off a deceitful and excessive loan? Do these loans take advantage of, and promote the residual badges and incidents of slavery that the Thirteenth Amendment sought to eliminate in society?
This Note discusses the Thirteenth Amendment implications found in payday loans and argues that the Thirteenth Amendment is a proper federal path through which to regulate payday lenders. Specifically Part II discusses Thirteenth Amendment history, scholarship, and court interpretations of peonage. Part III reviews payday lending by examining who typically takes out these loans, what the conditions of the loans generally are, and evidence as to how these loans affect the borrowers. This section also discusses the coercive techniques payday lenders use to rope borrowers into abusive loans. Finally, Part IV analyzes how conditions of payday loans trigger Thirteenth Amendment concerns. Part IV argues that by looking at the structure of the loan itself, its organization around a person's paycheck, its direct relationship with a person's labor, and the lender's coercive means to compel a borrower to take out additional loans, the Thirteenth Amendment is implicated. The targeted victims of payday lending, particularly the underclass, are proper recipients of Thirteenth Amendment relief, as they are suffering the precise effects of involuntary servitude that the Amendment was designed to eliminate.
To be sure, there will be many who disagree with the comparison of payday borrowers to antebellum slaves. I do not argue that these borrowers are subjected to the same racially infused servitude, hate, violence, and abuse. However, I do argue that the free labor concepts that drove the Thirteenth Amendment's ratification apply, and that the type of contract that payday lenders rope borrowers into is like that of the peonage contracts that are already acknowledged to fall within the bounds of the Thirteenth Amendment's prohibitions. Payday debtors, because of the type of loan that suppresses their free labor, suffer from the badges and incidents of slavery that the 38th Congress--which enacted the Thirteenth Amendment--and subsequent Supreme Court decisions sought to eliminate. Today's underclass suffers from social and economic conditions that restrict their social and physical mobility, and constrain their economic options and life decisions. These are conditions the Thirteenth Amendment aimed to prevent. While initially passed to end African Slavery in this country, the Thirteenth Amendment is relevant today, as the conditions poor people face do not allow them to be meaningfully free.
II. Thirteenth Amendment Background and Scholarship
Section 1. Neither slavery nor involuntary servitude, except as a punishment for crime whereof the party shall have been duly convicted, shall exist within the United States, or any place subject to their jurisdiction. Section 2. Congress shall have power to enforce this article by appropriate legislation.
A. Thirteenth Amendment History and Judicial Development
Enacted in 1865, the Thirteenth Amendment prohibited the institution of chattel slavery in the United States. The framers of the Amendment did not utilize specific language to narrow its scope to African-American ex-slaves. Consequently, the Amendment protects “anyone regardless of race or their relationship to nineteenth-century slavery; the remnants of slavery as encountered by anyone regardless of race or their relationship to nineteenth-century slavery; or any discrimination, humiliation, or subjugation as to anyone.” As the Supreme Court held, “While the immediate concern [of the Thirteenth Amendment] was with African slavery, the Amendment was not limited to that . . . [i]t was a charter of universal civil freedom for all persons, of whatever race, color, or estate, under the flag.”
In addition to the text, the intent of Congress was to expand the Amendment to non-Blacks. In 1865, Congress was committed to ridding the country of slavery and to promoting free labor in which all people were entitled to enjoy the fruits of their own labor. This commitment encompassed both Blacks and Whites, as Congress recognized that Southern slavery had decreased workers' wages and had stigmatized agricultural and hard labor. Senator H. Wilson, addressing Congress during the Thirteenth Amendment debates, stated:
[t]his gigantic crime against the peace, the unity, and the life of the nation is to make eternal the hateful dominion of man over the souls and bodies of his fellow men. Those sacrifices of property, of health, and of life, these appalling sorrows and agonies now upon us, are all the merciless inflictions of slavery . . . . Yes, slavery is the conspirator that conceived and organized this mighty conspiracy against the unity and existence of the Republic . . . .
Senator Wilson pronounced that slavery was the only “foe our country has on the globe . . .” and that “every word spoken, every line written, every act performed, that keeps the breath of life in slavery for a moment, is against the existence of democratic institutions, against the dignity of the toiling millions, against liberty, the peace, the honor, the renown, and the life of the nation.”
Accordingly, the Thirteenth Amendment--passed to end immoral, racial slavery-- was also passed with a broader view: that one should own his own labor and be free. Thus, its passage prohibited “all repressive conduct rationally related to the impediments of freedom, not simply racist labor practices.” When Senator Wilson and Representative Ingersoll addressed to the 38th Congress that the “poor [W]hite man” was also a victim of slavery, they recognized that poor people, regardless of their race, suffered the effects of slavery--not just African Americans. The debates give us insight into the broader scope of the Thirteenth Amendment's vision. While the 38th Congress had yet to recognize that others in the country were suffering from badges and incidents of slavery--namely Native Americans --the vision of the Thirteenth Amendment was to prevent the involuntary servitude of all in the country, to whomever was suffering from its conditions.
B. Peonage--The Work Contracts that Broke the Debtor's Bank
Subsequent statutes, stemming from the Thirteenth Amendment, made peonage unconstitutional. Prior to the enactment of the Thirteenth Amendment and these statutes, peonage was the subject of a seminal New Mexico case, Jaremillo v. Romero. The case concerned, Mariana Jaremillo, a servant whose father took her away from the service of her master while she still owed $51.75 that her master previously advanced. Mariana did not appear at trial, and was rendered a judgment for twenty-six months of work, or for the amount she owed, interest, and all costs. The district court held that Mariana owed her employer, Romero, the securities on her appeal bond, the sum of $56.21, and the costs of the suit to be taxed. Furthermore, in default of the payment that she owed, she had to serve her master as a peon until debt was paid.
Ultimately the Supreme Court of the Territory of New Mexico reversed the judgment of the lower court with costs to Romero for a lack of evidence of debt owed. The court defined “peon” and “peonage” as people indebted to their masters.
This was the cord by which they seemed bound to their masters' service . . . . Upon entering the new service, or while continuing therein, the peon was held rigorously to fulfill his pledge and render his labor so long as his debts remained, or an additional one was incurred.
The characteristic that separated peonage from slavery was that “[c]onsent of the parties was invariably the foundation upon which a servant became bound to service.” Peons could leave their service by paying back the debt to the master, or by working it off. A person in the condition of peonage lost:
[n]one of his rights as a citizen by contracting with a master to serve him. He [was] under no political disqualifications; he [voted] at all elections if otherwise legally qualified; his servitude [did] not render him under our laws ineligible to the offices of the precinct, the country, the legislature or delegate in congress.
In 1911, the U.S. Supreme Court opined on the unconstitutionality of peonage under the strictures of the Thirteenth Amendment in Bailey v. Alabama. There, Bailey was convicted under an Alabama statute for obtaining fifteen dollars under a written contract with intent to injure or defraud his employer. Bailey borrowed fifteen dollars and agreed to spend a year working off the debt. The Court found that although in the system of peonage the debtor contracted to perform the labor, this did not legalize the state's attempt to enforce the contract. In fact, the Court held the contract to be unconstitutional under the Thirteenth Amendment and it did not matter whether the debtor voluntarily or involuntarily entered into a peonage loan. The Bailey Court found that, whether entered into voluntarily or involuntarily, the classification of the loan:
implies simply a difference in the mode of origin, but none in the character of the servitude. The one exists where the debtor voluntarily contracts to enter the service of his creditor. The other is forced upon the debtor by some provision of law. But peonage, however created is compulsory service, involuntary servitude.
It was not the employment contract that was found unconstitutional, rather the type of contract that prevented a person from enjoying the fruits of their labor --a coercive contract. The contract was tied to the debtor's labor; this was unconstitutional. The employer-employee relationship was not at issue.
Justice Field's dissent in the Slaughter House Cases further synthesized the right to control one's labor with the Thirteenth Amendment. Justice Field wrote that the Thirteenth Amendment should prevent peonage and any other form of “compulsory service for the mere benefit or pleasure of others.” He concluded that involuntary servitude manifested itself into the effects of the type of one's labor, stating:
[the Thirteenth Amendment] was intended to make every one born in this country a freeman, and as such to give to him the right to pursue the ordinary avocations of life without other restraint than such as affects all others, and to enjoy equally with them the fruits of his labor. A prohibition to him to pursue certain callings, open to others of the same age, condition, and sex, or to reside in places where others are permitted to live, would so far deprive him of the rights of a freeman, and would place him, as respects others, in a condition of servitude.
Furthermore, Justice Field pronounced that any compulsion that would force one into labor, even for his own benefit “only in one direction or in one place” would be nearly as oppressive as the “compulsion that would force him to labor for the benefit or pleasure of another, and would equally constitute an element of servitude.” Following Justice Field's line of reasoning, it matters not why someone enters into the oppressive contract, but only that one is forced by their social conditions into involuntary servitude.
The Supreme Court also wrote about the cyclical debt that is inherent in peonage. In United States v. Reynolds, G.W. Broughton acted as surety for two convicts by paying their court fines and contracting them to work in order to pay off the debt. One of the convicts was charged with violating a labor contract to work off debt to another creditor. The Court found that the labor contracts created by surety were harsher than the labor requirements of the state to repay the fines. While the convicts were technically being punished for their crime as allowed by the express terms of the Thirteenth Amendment, the terms of their labor contract were not fixed by the state. The convicts were working under constant coercion and threat of arrest, thus the system was found to be in violation of the Thirteenth Amendment. The Court wrote, “The convict is thus kept chained to an ever-turning wheel of servitude to discharge the obligation which he [h]as incurred to his surety, who has entered into an undertaking with the state, or paid money in his behalf.”
The U.S. Court of Appeals for the Ninth Circuit in United States v. Mussry suggested that due to modern economic realities, the slaves that were the original concern of the Thirteenth Amendment are today's migrant workers and domestic servants, and that the methods of coercion have become more subtle yet equally effective. Accordingly, the court held that psychological coercion of workers is a form of threat addressable under the Thirteenth Amendment. More specifically, in Mussry, the defendants led their Indonesian servants to believe they had to work in order to repay the defendants for money spent on their travel to the United States. The defendants took advantage of the fact that their Indonesian servants were “in a strange country where they had no friends, and had nowhere to go, did not speak English, had no work permit, social security card, or identification, no passport or return airline ticket . . .” and therefore, “no means by which to seek other employment, and with insufficient funds to break their contracts . . . .” There the court held:
[c]onduct other than the use, or threatened use, of law or physical force may, under some circumstances, have the same effect as the more traditional forms of coercion--or may even be more coercive; such conduct, therefore, may violate the 13th amendment and its enforcing statutes. The crucial factor is whether a person intends to and does coerce an individual into his service by subjugating the will of the other person. A holding in involuntary servitude occurs when an individual coerces another into his service by improper or wrongful conduct that is intended to cause, and does cause, the other person to believe that he or she has no alternative but to perform the labor.
The Mussry test therefore finds a sufficient showing of psychological coercion to prove involuntary servitude, even in the absence of physical or threatening force.
The early cases addressing peonage, whether voluntary or involuntary, all have a common denominator: labor contracts restricting an individual's free exercise of labor and economic independence. Professor Baher Azmy wrote of the peonage cases discussed above, contending “[t]hat the cases nevertheless advanced a central concern of the Thirteenth Amendment framers: protecting the mobility of labor and meaningful opportunities for economic independence.” In Professor Azmy's analysis of Bailey v. Alabama he wrote:
[T]he Court was advancing a central Republican insistence that men be able to enjoy the ‘fruits of their own labor.’ This distinctive libertarian vision required that labor be mobile, and untethered to absolute control of another private person and that men must have the right to control basic life choices, including when and for whom they work. In such a free system, Republicans believed that men could partake in the continuing, natural process of progressing toward economic independence and social improvement.
Modern day Thirteenth Amendment scholarship calls for protection of all people from arbitrary restraints of freedom. Freedom of labor aside, Thirteenth Amendment expert Professor Alexander Tsesis argues that the Amendment should protect free people's “conceptions of, and quests for, qualitatively good lives.” Under this standard, peonage suppresses “life aspirations [by] prohibiting [debtors] from entering into marital contracts, from choosing professions, and from making a host of other important life decisions.” In his call for modern Thirteenth Amendment litigation and legislation, Professor Tsesis writes “[p]rotecting essential freedoms means ending coercive practices and enabling people to make reasonable choices . . . . Using the Thirteenth Amendment for that end would be a legitimate use of governmental power to provide for the common good.”
C. The Badges of Slavery Apply Even Without Slavery
The state of peonage was considered a symptom of slavery, but certainly was not the only symptom. In Bailey the Court stated that the plain intention of the Thirteenth Amendment was to:
[A]bolish slavery of whatever name and form and all its badges and incidents; to render impossible any state of bondage; to make labor free, by prohibiting that control by which the personal service of one man is disposed of or coerced for another's benefit, which is the essence of involuntary servitude.
The Bailey court thus recognized that the symptoms of slavery still existed, and that these symptoms, called the “badges and incidents” of slavery, were unconstitutional under the Thirteenth Amendment.
The Supreme Court in The Civil Rights Cases elaborated on the relationship between badges and incidents of slavery and the Thirteenth Amendment:
It may be that by the black code . . . in the times when slavery prevailed, the proprietors of inns and public conveyances were forbidden to receive persons of the African race, because it . . . was merely a means of preventing . . . escapes, and was no part of the servitude itself . . . . The long existence of African slavery in this country gave us very distinct notions of what it was, and what were its necessary incidents. Compulsory service of the slave for the benefit of the master, restraint of his movements except by the master's will, disability to hold property, to make contracts, to have a standing in court, to be a witness against a [W]hite person, and such like burdens and incapacities were the inseparable incidents of the institution. Severer punishments for crimes were imposed on the slave than on free persons guilty of the same offenses.
The Court in Jones expanded on this concept, reversing a district court's dismissal of a complaint brought by plaintiffs who were not allowed to buy a home because of their race. The Court explained that just as the Black Codes enacted after the Civil War had restricted the free enjoyment of rights, so did the exclusion of African-Americans from White communities. The Court continued, “[w]hen racial discrimination herds men into ghettos and makes their ability to buy property turn on the color of their skin, then it too is a relic of slavery.”
Since Jones, the Court has indicated that it is Congress' responsibility to interpret and give meaning to the “badges and incidents” of slavery. The Court also has acknowledged that the Amendment's reach is much broader than that of the other Reconstruction Amendments--the Fourteenth and Fifteenth Amendments. Accordingly, the Supreme Court has never ruled that the Thirteenth Amendment is limited only to the conditions of literal slavery. Rather, actual slavery, as well as the “badges and incidents” of slavery, or the legacies of slavery, are both prohibited by the Thirteenth Amendment.
The question becomes, what reasonably constitutes a “badge or incident” of slavery? Professor Donald P. Judges argues that today's underclass experience badges and incidents of slavery in their impoverished economic and related social conditions, regardless of race, “joblessness, crime, welfare dependency, drug addiction, inadequate health care and broken families . . . .” Conditions that are severe enough to form a caste society thus are considered badges and incidents of slavery, especially when they promote a cycle of poverty, rendering the underclass “chronically disadvantaged.” More specifically, these conditions are manifested through “denial of freedom of movement, ability to own or dispose of property, the right to make and enforce contracts . . . .” Furthermore, scholars have posited that “human trafficking, hate speech, child abuse, violence against women, abortion, the citizenship of children of immigrants, the autonomy of American workers, and U.S. corporations' use of exploited foreign laborers” are all encompassed by the Thirteenth Amendment's prohibition of incidents of “involuntary servitude.”
Economic independence is a priority of the Thirteenth Amendment's goal to eliminate the badges and incidents of slavery, and is an essential predicate for an inclusive, free democratic society. “Economic independence is necessary if the citizen is to be able to deliberate on the common good, the res publica, the thing public.” The freedoms afforded under the Thirteenth Amendment are threatened when citizens have failed to be set free from economic dependence. Professor Amar argues that the Thirteenth Amendment should be interpreted to “guarantee each American a certain minimum stake in society.” This will help create independent citizens who have economic opportunity, a voice in the political arena, and who are not socially isolated--a central goal of the Thirteenth Amendment. Professor Amar suggests that insurance of minimal entitlements are a constitutional duty and the nation needs minimum birthrights for every individual. If you view the minimum stake in society as a floor for minimum rights enjoyed by every individual in this country, those below the floor will suffer from economic, political, and social isolation which leaves them vulnerable to suffering the “badges and incidents of slavery.”
III. Conditions of Taking Out a Payday Loan
The underclass is the payday lender's most profitable customer base, therefore, payday lenders market directly to members of the underclass even if the loans are unaffordable. Affluent and sophisticated consumers are less likely to make mistakes when shopping for loans because they are better educated about financial products or they can hire experts to help them. Additionally, to the extent they make a mistake, they have the financial ability to recover. By contrast, payday lenders design products that exploit poorer consumers' mistakes. Lenders advertise that payday loans are a fast and easy way to get a loan, especially for those with “bad” credit. The industry advertises via radio, television, internet, and mail. Moreover payday lenders will entice debtors to take loans by offering free and promotional payday loans to first time borrowers as well as referral fees to existing customers for referring new customers. The underclass “lack[[s] the financial cushion that rich consumers have, and therefore they are more vulnerable to the unexpected costs of credit products and more likely to stumble into financial distress.”
Furthermore, payday lenders disproportionately target minorities especially African-Americans and Hispanics, along with military members and women. Payday lenders target minority communities by opening in poorer neighborhoods that are often comprised of a large number of minorities. The lenders even go so far as to develop business plans to promote the targeting of minorities and welfare recipients. It is well known that payday loans are “designed to extend credit to borrowers who are denied access to traditional credit products . . . [and] the broad exposure of minorities to payday loans and subprime mortgages implies a broad exposure to the risks associated with these products.”
In further taking advantage of the borrower, payday lenders are fully aware that “many lower-income people are intimidated by banks.” Using this to their advantage, “friendly” payday lenders make customers feel at home and accepted so that they are comfortable taking out initial loans and then returning to borrow more. These practices suggest that lenders are wolves in sheep's clothing. When the debtor's loan rolls over, the borrower typically will end up paying $1800 for a $300 loan. Lenders know that borrowers will pay any interest rate for fear of not making other basic payments, such as for food or electricity.
Payday lenders characterize a payday loan as a short-term loan, yet the loan is designed as interest-only so the “principal essentially stays out forever, while the lender recoups the money he has loaned in only four weeks.” This distinguishes payday loans from other types of loans, such as credit card loans or home mortgages, which are designed to pay off the principal and the interest in installments. The typical payday debtor finds it impossible to repay the principal balance by the end of the loan period. This leads to a “rollover”--which occurs “when a customer, unable to repay the full principal and unwilling to fall into default if the payday lender attempts to cash her check, rolls the payday loan over for another pay cycle . . . .” Rollovers are the “bread and butter” of the payday lending business.
Payday loans are not necessarily related to a borrower's income. While a credit report is not required to take out a payday loan, the lenders do whatever they can to make sure they receive payments. The borrower is required to “enter into a bank debit agreement that enables the lender to debit the rollover fee from her bank account every two weeks.” Moreover, it is becoming increasingly popular to have a borrower authorize her employer to pay a lender directly from her wages. These wage assignments ensure that the payday lender will receive its payment before the borrower is able to pay other bills, creating a dependence on the payday lender to provide more loans, proliferating the borrower's cycle of debt.
There is a great deal of direct and indirect coercion in payday lending. Discussing examples of such coercion, and even outright fraud, in predatory lending, Professor Kathleen C. Engel and Professor Patricia A. McCoy wrote, “[l]ending fraud comes in endless varieties and is only limited by the ingenuity of the perpetrators . . . . The first type of fraud consists of deception aimed at borrowers.”“The most notorious deceptions include fraudulent disclosures, failures to disclose information as required by law, bait-and-switch tactics, and loans made in collusion with home-repair scams.”
Coercion exists within the methods by which payday lenders characterize the annual percentage rate (APR). The APR is advertised to the borrower as a fee for procuring the payday loan, but generally comes with additional features, trapping unwary consumers with inordinate fees. These “fees” are essentially a finance charge and when they are actually expressed as an APR it is clear that the percentage rate is astronomically higher. For example, a borrower who requests a $100 loan, writes a check for $115, and receives a cash advance of $100; the $15 fee on that loan translates to an APR of 390%. Depending on the transaction and the jurisdiction, the APR for a payday loan can reach even higher, and range up to 871%. The borrower will not realize that this fee is actually an APR because lenders do everything they can to make sure the borrower does not fully understand the implications of the fees. Payday lenders profit enormously from this type of deception through APR fees.
Professor Michael A. Satz identifies further deceptive practices payday lenders employ to reel in borrowers. “Affinity marketing” schemes are used to mislead customers into thinking that the loans offered are government sanctioned. In addition, lenders encourage borrowers to “enter alternative lending transactions that are designed to skirt, or even break, the laws attempting to regulate the payday lending industry.”“These alternative lending practices include the sale-leaseback transaction, the cash-catalog sale and cash-back advertising.”
Finally, debt collection options that traditional debt collectors may not use are available to payday lenders. Payday lenders will harass customers and their employers and relatives with vexing telephone calls, threaten violence against customers unable to repay, collect excessive damages from customers, and threaten criminal prosecution against customers who fail to make payments. Some criminal bad-check statutes enable a payday lender to coerce borrowers into paying their debts to avoid criminal prosecution. The analogy has been made that “payday lenders use the threat of jail just as a loan shark might have used the threat of physical violence.” Some of the lenders file criminal complaints in faraway jurisdictions, rendering it impossible for the borrower to respond to the suit. Payday lenders may place a hold on a debtor's checking account to enforce a payment. Complicated arbitration agreements are now emerging in payday loan contracts, and “payday loan companies rely on the in terrorem effect to dissuade consumers from bringing lawsuits.” Borrowers generally sign away any meaningful legal redress available to them when executing many payday lenders' agreements that include mandatory binding arbitration agreements.
When it comes to receiving their money, payday lenders emerge like wolves, using coercive and frightening tactics to get their payments. As this discussion makes clear, payday lenders engage in various conduct at several stages--from marketing, issuing the loans, and collecting payment--that can be described as opportunistic or aggressive at best, and coercive and predatory at worst.
IV. Payday Debt Peonage
Peonage stemming from payday lending is a legitimate Thirteenth Amendment problem that should give rise to remedial action under this constitutional provision. As a threshold matter, it is critical to respond to an important anticipated criticism. Because payday lenders do not employ their borrowers, some might argue that Thirteenth Amendment peonage arguments do not apply in this context. This critique, however, takes too narrow a view of peonage under the Thirteenth Amendment. The lack of a literal employment relationship is inconsequential as the court in Jaremillo v. Romero explained. The circumstances surrounding the loans render them coercive, and the loans are tied directly to the debtor's paycheck. Furthermore:
[t]he fact that the debts may have been voluntarily incurred is irrelevant. The fact that the debtor may not be tied to a particular employer or type of work is also irrelevant, since the reasoning of the peonage cases does not rest on the existence of a particular employer. Nor is such an order saved by its civil nature, since the keys to the jail are found only in the coerced labor itself.
A. Peonage: Economically Trapped & Involuntary Serving Payday Lenders
While payday lenders are not literally the debtor's employers, their relationship is analogous to the typical employer-employee relationship present in the peonage cases. The Thirteenth Amendment, the Anti-Peonage Act, and multiple judicial decisions guarantee freedom from forced labor to those trapped by indebtedness. The structure of payday loans traps debtors in their indebtedness, forcing them into a cycle of never-ending debt. Payday loans are designed to maintain a borrower until her payday, require the debtor to secure the loan with a post-dated check or debit authorization, and are meant to be paid back in one lump sum when the consumer receives her paycheck. Thus, the debtor is quite literally working off the debt for the payday lenders. Payday loans have a direct relationship to the debtor's labor, and the fruits of her labor. Like the court found in Jaremillo v. Romero, these loans hold a debtor until she fulfills her debt and render her a laborer so long as the debt remains.
Threats of criminal prosecution for failing to pay back the debt are unconstitutional under the Thirteenth Amendment, yet this does not stop payday lenders. The loan structure, issuing borrowers the loan via a post-dated check, is another tool of coercion. Payday lenders take advantage of the borrower's fears of prosecution and jail by threatening customers with criminal prosecution for writing bad checks. Historically payday lenders threatened to present the wage assignment (now replaced by a post-dated check) to the debtor's employer, who could terminate the debtor. Today, even if payday lenders cannot legally prosecute a borrower, they still “use the criminal justice system as a collection agency.” Payday lenders possess “a strong economic incentive to threaten customers with criminal prosecution. Payday loan customers will do whatever it takes to keep from going to jail; thus, payday lenders are assured of getting paid as long as consumers fear imprisonment.”
Furthermore, borrowing from payday lenders traps the borrower in a cycle of debt and a coercive labor-for-debt relationship. As Professor Nathalie Martin points out:
[V]ery few customers can afford to pay back the loans. Rather . . . most customers find it necessary to continue to pay $1000 to borrow $500 for twenty weeks, or to pay $100 in interest every two weeks--for the rest of time--on an original loan of $400.
Payday loan fees and interest hikes are other tools of coercion. Debtors, worried about mounting interest and the unpaid principals, must work tirelessly just to keep up with payments. The thought of accruing more debt under the terms of the loan is frightening to debtors, as many of them spend their entire paycheck to keep up with the payments.
Although the initial decision to enter into a payday loan is generally considered to be voluntary, the nature of the subsequent relationship between the lender and the debtor often becomes coercive. As Bailey clarifies, coercion can exist irrespective of whether a loan was entered into voluntarily. Payday lenders often encourage repeat borrowing, and borrowers often feel they must take out additional loans to keep up with payments on a previous loan.
Furthermore, some payday loans are not even truly voluntary at the outset. Individuals who utilize payday loans are disproportionately a part of the underclass. Professor Randall Kennedy characterizes the consequences of being poor as being particularly vulnerable to “terrors of nature, bad luck and communal failure,” and further argues that people living in poverty turn to financial loans and payday lenders to meet basic survival needs. Under contract law, a person who agrees to take out another loan in order to make an existing loan payment and pay rent is arguably under duress, as he or she is trying to prevent the potentially devastating alternatives to not having that money. The creditor knows the status of the debtor's credit, income, debt, and that the short-term credit product is “harmful if used on a continuing basis.” Payday lenders are indifferent to the dire financial situation of many borrowers, and instead exacerbate such problems by making it next to impossible for borrowers to pay back the loan. In addition, lenders take advantage of borrowers' fears of increased poverty or possible imprisonment by using aggressive and inappropriate collection practices, which encourage debtors to borrow even more.
This is not unlike the defendants in Mussry who knew that their domestic servants had no other recourse but to work for them. Lenders know that the debtors are desperate, and struggling to stay afloat financially. They use psychological tactics to coerce debtors into thinking that their loans are the only way to stay financially ahead.
B. Payday Loans Perpetuate the Badges and Incidents of Slavery
Trapped by payday loans, a debtor's ability to escape her marginalized economic and social situation is stunted--a valid Thirteenth Amendment concern. Mobility is restricted, as it takes capital to move, and any of the debtor's extra capital is dedicated to paying off these loans. Payday lenders make most of their money from repeat debtors, which suggests that borrowers' confinement to the debt cycle is not only financial, but also geographical. Debtors cannot make important life decisions such as whether to move, get married, or change professions. The inability of many payday loan borrowers to make such life decisions creates physical isolation and indicates social and economic conditions that present Thirteenth Amendment concerns.
Geographic isolation only perpetuates payday borrowers' poverty and lack of access to resources. Professor Sidhu writes, “Importantly, as a result of their physical isolation and exposure to the conditions within them, including inadequate public education, the probability of modest economic success for the urban underclass is practically a foregone conclusion.” Like “[t]he inability of slaves to move beyond accepted boundaries or travel broadly was a fundamental element of slavery,” the payday debtor is unable to move out of his or her physical location to another that may present better economic opportunities. A large part of this isolation is due to the extreme debt the debtors find themselves in because of payday lenders. This inability to move out of their physical environment is reminiscent of a slave's inability to leave their master's plantation.
The argument for a minimum stake in society posited by Professor Amar also calls for the freedom of movement. Physical immobility is “an additional manifestation of the absence of a nominal stake in society that the Thirteenth Amendment ensures, as the meaningful freedom of movement is a precondition for participation in the modern economy.” Furthermore, debtors trapped by payday loans are not afforded the same opportunities as those with a certain measure of economic wherewithal (i.e., the upper classes), and thus do not have a minimum stake in society. Payday debtors have negative capital that keeps growing negatively due to the nature of the loan. When the poor have a growing negative capital, they become consumed with keeping up with payments, becoming more and more dependent on payday loans. This economic dependency, Professor Amar argues, is what the Thirteenth Amendment seeks to eliminate. When the lower class does not have a minimum stake in society, they are more vulnerable to suffering from the devices and incidents of slavery.
In California alone, repeat African-American and Hispanic borrowers spend $247 million in payday loan fees annually. This takes money away from their communities--money that could be spent on bills or emergency costs, and to keep the borrower out of debt. The Center for Responsible Lending found that payday lenders were about eight times as concentrated in neighborhoods that were predominately African-American and Latino as compared to Caucasian neighborhoods. Seemingly, payday lenders are taking advantage of the physical isolation of poor minorities, perpetuating the badge of slavery identified in Jones--herding minorities into ghettos and inhibiting their economic ability.”
Moreover, the cycle of debt perpetuated by payday lenders is a huge factor in keeping the underclass chronically disadvantaged. Because payday lenders specifically target the underclass, especially the minority underclass, they are exploiting the economic conditions this class lives under. Moreover, payday lenders actively work to keep the underclass “under,” knowing poor people yield the highest profits for their lending institutions.
V. Conclusion
The payday lending crisis is a symptom of a larger social mobility problem in the United States--regulating payday lenders will be a significant step towards improving our nation's economy and creating a fairer economy for our poor. Upward social mobility in the United States has all but become stagnant in recent years, and payday lenders profit from and promote this stasis. To illustrate, in Denmark, Finland, Norway, Sweden, and the United Kingdom, between twenty-three and thirty percent of sons and daughters born to fathers who were in the bottom fifth of their country's earnings remained in the bottom fifth. However, in the United States, the same statistic rises to forty-two percent. The U.S. Census reported 46.2 million people were living in poverty in 2010, the highest poverty rate since 1959.
A lending industry that profits from a weakening economy and targets the underclass as their most lucrative borrowers creates constitutional consequences that must be addressed. The terms of these loans, the coercive nature of the lenders, and the demoralizing and destructive consequences for the borrowers reflect exactly what the framers of the Thirteenth Amendment sought to eliminate. A line can be drawn to distinguish payday loans from other types of loans. Historically, loans have not been interest-only loans. Not every loan presents the issues of peonage and promotion of the badges and incidents of slavery as a means of greater income. Payday loan consumers must be protected. These loans, at the very least, must be regulated to do away with the involuntary servitude they create.
Seventeen states have already effectively banned payday lenders. Continuing this trend would solve this constitutional issue most effectively. Until all states safeguard borrowers from payday lenders, federal involvement is appropriate and the Thirteenth Amendment is, as demonstrated, a proper federal mechanism for Congress to use in regulating payday lending.
There is a danger in not recognizing the Thirteenth Amendment issues payday lenders present. There is essentially a caste in American society that has extremely limited economic opportunity, no political stake in their community, and is socially isolated. This raises serious Thirteenth Amendment concerns. Payday lenders trap an already vulnerable group, keeping them tethered to the dire economic situation that they live in, while profiting from it.
There is a solution already in place in our Constitution. The Supreme Court has never struck down Congress when exercising its Thirteenth Amendment powers. The Thirteenth Amendment is the vehicle that Congress should use to regulate payday lenders. Instituting federal usury caps would halt triple digit interest rates in this country, and provide legal protection for the poor. Placing a national usury cap on these types of loans would be a huge step toward preventing the cycle of debt payday lenders promote. Borrowers would still have the opportunity to borrow, but the impossible interest rates that act as a strangle-hold on debtors would not be a part of the loans.
There is a broader danger if Congress fails to act on this Thirteenth Amendment problem. If Congress does not recognize and remedy the fact that these lenders are preying upon underclass in America, they fail to recognize that the underclass is a viable part of our economy and our society that deserves the same protections as those who already have a minimum stake in society. The underclass will continue to be disempowered, and will continue to suffer from the badges and incidents of slavery. If our country allows payday lenders to continue to profit from the underclass because of their economic, political, and social isolation, our country is not only approving these predatory, practices, but saying that it is acceptable for the underclass to be shackled to their place in society, and that it is acceptable for payday lenders to profit from their suffering.
Finally, to allow payday lenders to continue preying on the underclass, to allow them to continue making loans that de facto enslave borrowers, is to allow them to act without regard for the purpose of the Thirteenth Amendment, for it is an act taken against democracy, against the dignity of the toiling millions, against liberty, the peace, the honor, the renown, and the life of the nation.
. Zoe Lees will graduate from University of New Mexico School of Law in 2013.
