Decision Says Title Loans Are Unconstitutional
Dan alerted me to the story. I want to say the judge is one hundred percent totally correct, and that his ruling is iron clad and unassailable. Because if title loans are unconstitutional then maybe I would not have to see any more of those stupid Title Max commercials.
I can’t say that, but I have changed my view about the opinion. I said in a comment to Dan’s post that I thought it was a bad decision. Now I’m not sure.
Here’s the important part of the news account:
St. Clair County Circuit Judge Charles Robinson Sr. ruled the act violates equal protection rights by allowing title loan companies to charge as much as 300 percent interest a year while restricting other lenders to 24 percent annually. . . .
Waites, a St. Clair County resident, took out the loan against his truck title in 1998, agreeing to pay 25 percent interest a month, or 300 percent a year. Express Enterprise repossessed and sold the truck when Waites quit paying after making nine consecutive $100 payments, saying the $900 had only gone to interest.
Robinson ruled the result of having one borrower pay 300 percent and others having their loans capped at 24 percent was “arbitrary and capricious, and ultimately discriminates” against both traditional lenders and those borrowers “for whom the usurious rate laws were meant to protect.”
“In effect, pawnbrokers are allowed to overcharge persons who would otherwise enter into loans subject to the Alabama Small Loan Act,” he wrote.
When the Legislature makes a classification, he said, it must not be “mere subterfuge to shield one class and burden another.”
I’m guessing, based on the language about the legislature making a classification, that the decision relies on the equal protection clause. Generally, whether a statute survives an equal protection challenge is determined primarily by the applicable standard of review. If a statute, for example, discriminated against black people, then “strict scrutiny” would apply and the statute would almost certainly fail.
But that only applies in a very small number of situations. This does not appear to be one of them. “Poor people” don’t get strict scrutiny, because the group is too amorphous to adequately define. Businesses like the “traditional lenders” identified by the judge don’t get strict scrutiny either. They are powerful enough to look out for their own interests.
So the judge should have applied the lowest standard of review: Rational basis. (There is an intermediate, but it is limited to gender classifications). That means if there is any conceivable reason for a classification, it withstands the constitutional challenge.
I think the judge probably applied rational basis, because he used terms like arbitrary, capricious, and subterfuge. Those are all key terms in this standard. So he got the first step correct.
The problem is that rational basis is a rubber stamp. The requirement is not that the actual reason has to be a good reason; it’s that there has to be some rational reason, even if it isn’t the actual one or even a good one. Also, the challenger bears the burden of proof, which means they have to prove a negative: NO rational basis.
So what was the classification? Alabama’s Small Loans Act caps interest on loans of $1,000.00 or less. (Ala. Code 5-18-5(a)). However, the act exempts pawn transactions. (Ala. Code 5-18-4(b)).
In 1993, the Alabama Supreme Court had to decide in which category title loans belonged. Section 5-19A-2(3) of the code defines a pawn transaction as follows:
Any loan on the security of pledged goods or any purchase of pledged goods on condition that the pledged goods are left with the pawnbroker and may be redeemed or repurchased by the seller for a fixed price within a fixed period of time.
In these title loans, in exchange for cash the borrower gives the title and the keys to the lender. The borrower gets the vehicle back by paying X amount by Y date. So we have the loan, the security, and the redemption. The only question is whether the title counts as a good left with the pawnbroker. If so, then the transaction is a pawn transaction exempt from the small loan limits.
The Alabama Supreme Court (Floyd v. Title Exchange and Pawn of Anniston, 620 So.2d 576 (Ala. 1993)) basically said it did not know whether or not the title was a good. And because of that uncertainty, it held that the act did NOT cover title loans. The court held that because title loans had never been regulated, that the legislature would have to clearly include them. The statute did not do so, and thus the court held that they were not included.
So the legislature did not really exempt title loans; they exempted pawn transactions. The court decided that pawn transactions include title loans. Hence, they get exempted as well.
I’m sure there is a rational basis for exempting the usual pawn transaction. It’s normally a small amount of money, and probably the customer usually views it as a sale. They are not going to redeem it anyway, so it does not matter what the interest is. If this was just about the usual pawn transaction, it would clearly pass rational basis review.
But title loans are different. Folks need their cars and the amount of money is significant. It seems like all the same concerns that motivated the small loans cap ought to apply with equal force to title loans. Furthermore, though this does not really matter to rational basis review, it does not appear that the legislature really considered the issue of title loans.
So maybe there is no rational basis for the distinction. That isn’t to say that regulating interests rates is a good idea. But once they regulate them, they need to do so rationally.
I’m no economist, so anyone out their familiar with economics, or banking, or whatever, let us know if there is a rational reason to regulate small loans but not title loans.