Feb 2000 / Rollovers

PREPARED TESTIMONY OF DANIEL A. EDELMAN

REGARDING SENATE BILL 1275

Senate Bill 1275 does not go far enough in protecting the public from abusive payday loans.

ROLLOVERS

The bill permits an original loan and two rollovers, with a required 30 day waiting period before the same borrower can obtain another loan.

No rollovers should be permitted. The payday loan industry consistently claims that its product is intended to be a short-term, emergency source of cash until the next payday. If that is the case, the borrower should be able to repay the loan on his or her next payday.

Rollovers are a major source of abuse in payday lending. The loans are almost invariably "rolled over" on multiple occasions. The September 1999 report by the Illinois Department of Financial Institutions concludes (p. 6):

Customers rarely borrow a single time, in fact, repeat business is the main source of revenue. A single licensee may have a limited customer base, but if the customer regularly refinances a loan the store may be quite profitable.

While the payday lending industry claims that the loans are short-term transactions, the Illinois Department of Financial Institutions concluded that the average customer "remains a customer for at least 6 months". (Id., p. 26) This corresponds closely with industry analysts, who state that the average customer obtains 11 loans per year. Moreover, many consumers greatly exceed the average: "the [IDFI] examiners were finding customers who were borrowing continuously for over a year on their original loan." (IDFI report, p. 30) Once a consumer obtains a "payday loan," he or she will often be unable to pay it off except from the proceeds of additional "payday loans." "Instead of using a loan once in an emergency, borrowers tend to get on a treadmill of repeated loans they can't get off . . . . It's almost a pattern . . . It really is people who are desperate for money."

Payday lenders affirmatively encourage repeat transactions. The Illinois Department of Financial Institutions report found that "in fact, repeat business is the main source of revenue" for payday lenders (p. 6), and that 'having customers who make regular payments without paying down their principal balance helps to ensure profitability for short term lenders". (Id., p. 34) At the same time, "[t]he high expense of a short term [sic] loan depletes the customer's ability to catch-up, therefore making the customer 'captive' to the lender". (Id., p. 30)

A similar survey by the Indiana Department of Financial Institutions (Appendix A) found that only 9% of payday loans are not renewed, that the average customer had 10 renewals and one had as many as 66.

In addition, the prohibition against rollovers in S.B. 1275 will not be effective. By alternately lending to a husband and wife, or other members of the same family, a lender can keep a loan outstanding to the same individuals for months or years, as at present.

The bill should be amended to require a 30-day gap between loans to any person in the same household.

Section 45(c) of the bill proposes to enforce the gap by having all loan contracts include "a separate statement signed by the debtor attesting that the debtor does not have any outstanding loans made by a licensee under this Act within the preceding 30 days." This is not an effective means of enforcement. Desperate borrowers who are willing to sign loan agreements calling for 500% or 1,000% interest are going to sign such statements even though they are untrue. The only effect that the representation will have is to give the lender a basis for arguing that the borrower committed fraud, and that the loan is not dischargeable in bankruptcy.

ADVERTISING

Section 45(a) provides that "The loan contract must provide all disclosures required by Regulation Z of the Federal Truth-In-Lending Act." This should be extended to compliance with the credit advertising provisions of TILA. Many of the advertisements used by payday lenders violate the credit advertising provisions of the Truth in Lending Act and Regulation Z. Until recent lawsuits against payday lenders, they often did not advertise the annual percentage rates even though they stated the duration of the loan, finance charge as a dollar amount, and other "trigger" terms.

ABSENCE OF RATE LIMITATION

According to the September 1999 Illinois Department of Financial Institutions report, the average annual percentage rate charged on "payday loans" in Illinois was 533%. The highest we have seen is 2,007.5%, charged by a Springfield, Illinois lender. The Indiana Department of Financial Institutions reports that a consumer was charged 7,300% for a one day loan.

"Title loan" rates average 290%, which is extraordinarily high for fully secured credit.

The IDFI report concluded that "the average customer is usually a woman in her middle thirties earning just over $24,000 a year" (p. 26), and that "people living on fixed incomes are also targeted due to their inability to keep pace in a world of rising costs". (Id., p. 27) An informal industry survey indicated that the average customer is a white female earning between $14,500 and $20,000 per year, 28 years old, and employed in the service or health care industry. The second largest group of borrowers is African American.

One owner of a "payday loan" establishment attributed the sudden growth of cash advances to a cash strapped, lower middle-class. "More and more people earning $ 25,000 to $ 30,000 with two or three kids, a car payment and insurance payment, are living from payday to payday."

Payday lenders deliberately target working class borrowers. A press release issued by the parent of Payday Check Advance, Inc., which claims to be the largest payday lender in the Chicago area, with 32 locations as of March 31, 1999, states that "we target stores in working-class neighborhoods. All things being equal, the higher the concentration of our target demographic in the neighborhood the more productive the store location will be."

Statistics show that a substantial number of borrowers will not be able to repay the loans as agreed. Published reports indicate that the incidence of default on these loans is in the 20-25% range. If a payday lender claims a lower incidence of default, it is often because it is failing to take into account the effect of refinancings. If a borrower refinances three times and then defaults, the incidence of default for that borrower is 100%, not 25%.

These borrowers need protection against excessive rates. In this regard, it is necessary to understand that payday lenders are not subject to the same constraints on making loans as most lenders. Most lenders are required by law to assess the creditworthiness of their borrowers and to make loans only if they expect the borrower to repay. Banks, savings and loans, credit unions, and other conventional lenders are required to engage in prudent lending practices. This is why they require borrowers to fill out loan applications which state how much they make and how much they spend. The lender looks to the proportion of the debtor's income that will be spent after the loan is made, and analyzes whether it is sufficient to repay the loan.

Conventional financial institutions are examined by federal and state officials charged with the task of making sure that they are adhering to such standards. In the case of real estate loans, recent amendments to the Truth in Lending Act make it unlawful to engage in a pattern of making loans that can be collected only through foreclosure.

On the other hand, payday lenders do not assess whether their borrowers can repay the loans.In fact, they make loans which by definition leave the borrower unable to repay all of his or her debts. The typical borrower is someone living from paycheck to paycheck who has a sudden need for money. The payday lender requires the borrower to turn over 1/4 to 1/2 of his next paycheck to repay the loan. If the borrower's paycheck is barely sufficient to meet living expenses and has not allowed the borrower to build up any sort of reserve for emergencies, how can he turn over 1/4 to 1/2 of his paycheck to the lender and still pay for food and rent? Obviously, he cannot. "If you need money bad enough to go to one of these stores, you're probably not going to have the money to pay it off." The key to payday lending is that the lender believes that it can coerce the borrower into repaying the payday lender ahead of paying for food, rent, and other debts.

Payday lenders do this by obtaining postdated checks. When borrowers fail to pay or renew the loans, they deposit the checks. If the check does not clear, the lender threatens to enforce or does enforce the bad check statutes, even though the Illinois laws do not apply to a postdated check known to be worthless when issued, both because such a check is not within the terms of the statute it follows that issuing a bad check in payment of preexisting obligations not involving the obtention of property, labor or services, and not involving a tax obligation, is not covered. and because the lender intends to extend credit, and does not rely on any representation by the borrower that there is money or will be in the account, and understands that there is a high degree of risk. On several occasions, payday lenders in other states have attempted to use local bad check statutes against borrowers who file bankruptcy, without success. In re Gilmore, 217 B.R. 228 (Bankr. S.D.Ohio 1998). By threatening the borrower with quadruple damages or criminal prosecution, the payday lender insures that it will be paid ahead of any other creditors.

Industry sources openly acknowledge that the postdated checks are used as a means of coercing borrowers who cannot pay all of their debts to pay the payday lender first -- or, at least, to pay the interest for two weeks and "roll over" the loan. A recent brokerage house report touting the desirability of investing in the "payday loan" business states:

Structure Enhances Collections/Minimizes Losses - While the consumer may not have enough money to pay everyone he owes, we believe the structure enhances the probability that the payday lender will be the first debtor [sic -- creditor] paid. Depending on the state, the payday lender can often deposit the customer's check (often after the consumer has deposited his paycheck) if he does not go to the storefront to pay off the loan. Again, the potential for future NSF charges, and/or loss of check-writing privileges, will likely motivate the consumer to pay off his loans.

The postdated checks are not in fact used as a mechanism for obtaining repayment of the loans. The Illinois report concluded (p. 8):

The post dated checks are rarely cashed, due to high rates of insufficient funds, so customers are asked to make cash payment every two weeks or until the loan is paid in full . . . .

The use of the bad check laws greatly exacerbates the harm to the borrower. In one case, a borrower obtained a $200, two-week loan. The stated finance charge was $40. When the loan was not repaid on time, the lender sued under the Illinois bad check statute and got a default judgment for (i) $240, plus (ii) a $720 penalty, and (iii) $300 attorney's fees. Thus, the cost of borrowing $200 was $1,260! This is quite usual where borrowers fail to pay and are sued under bad check statutes.

The payday loan industry attempts to justify its charges as simply the result of amortizing a one-time fee for originating the loan over a very short period. This is not accurate. It costs about $8 to set up a payday loan account. This might justify charging $8 plus a reasonable rate on the money loaned. It does not justify charging $20 per $100 lent on a $500 two-week loan, which represents an annual percentage rate of 521%. It does not justify continuing to apply the 521% interest to the outstanding balance if the borrower defaults or rolls the loan over.

In fact, for most borrowers the payday lender does in fact collect 500% or more interest on credit that remains outstanding for a substantial period. This happens in two ways. First, many consumers obtain a succession of rollovers or refinancings. "[E]ven bad loans may be profitable because some customers pay for months before giving up." Second, in the event of a default, the lender keeps the interest running at the stated annual percentage rate.

Notwithstanding the extraordinarily high default rate, "payday lending" is very profitable. A study by the State of Tennessee (Appendix B) shows that when litigation settlements are excluded, the return on equity that payday lenders enjoy exceeds 30%, which is 2-3 times the national average for banking and industrial firms. A recent brokerage house report states that the return on investment may exceed 40%. Any claims by payday lenders of lesser profitability need to be carefully examined to see if they take into account the fact that many of these lenders are opening new stores and ploughing their profits back into the business.

Payday Check Advance, Inc., which claims that it is the largest payday lender in the Chicago area, states that "the low fixed costs have allowed new Payday stores to quickly turn profitable" and that "our target is to achieve an average monthly pre-tax profit of $4,000 per location."

The profitability of payday lending is underscored by the fact that many payday lenders are growing into national chains. For example, Check Into Cash opened its first office in 1993 and now has 320 outlets, with $21.4 million in revenue during 1997 and as much again during the first six months of 1998; it is planning to go public. Another "payday lender," Advance America, has nearly 500 outlets. Ace Cash Express, a publicly-held chain with over 800 outlets, collected $10.1 million in payday loan fees during fiscal 1998. Another major chain is Check & Go, operated by CNG Financial Corporation of Cincinnati. A local Chicago chain, Sonoma Financial Corporation, which does business as Payday Express, recently announced a merger with Virginia-based Easy Money Group; the combined operations will have more than 150 payday loan stores in 18 states. Another large Chicago-area payday lender, Instant Cash Advance (One Iron Ventures) was recently acquired by a public company. At the present time, about 1/3 of all payday loan outlets are owned by 6 chains.

Clearly, given the nature of the "payday loan" and "title loan" business, rate limitations are necessary to protect the public.

EFFECT ON OTHER LENDERS

By allowing such advantageous provisions for the payday loan industry, the bill will adversely affect other lenders.

First, a high number of payday loan borrowers ultimately are forced into bankruptcy. This will discharge other loans and credit or allow the debtor to pay a reduced amount over a long period of time. In many cases, the consumer is driven into bankruptcy by the payday loans -- they can handle their other debts, but not the interest on the payday loans.

The harmful effect on other creditors can be expected to increase with the proliferation of payday loan establishments. We are already seeing instances in which banks and credit card issuers are having their obligations wiped out because payday loans force a borrower into bankruptcy. In California, banks have been hit so badly by payday loan defaults that they are now supporting regulation of payday lenders.

Finally, even if the borrower does not declare bankruptcy, they are more likely to default on other loans which do not continue to accrue interest at the astronomical rates of payday lenders.

ANOTHER INDIANA PAYDAY LENDER SUED

The Chicago law firm of Edelman, Combs & Latturner and Indiana attorney Lemuel Stigler have filed a class action lawsuit against Check 'n Go of Indiana, Inc..

The complaint alleges violation of the Truth in Lending Act and Indiana law in connection with "payday loans." It was filed in the federal district court in South Bend. Niblack v. Check 'n Go of Indiana, Inc., 3:00CV72 (N.D.Ind.).

One of the Indiana laws alleged to have been violated is the Indiana Uniform Consumer Credit Code. The Code (i) prohibits lenders from charging interest of more than 36% per annum interest, (ii) allows a flat fee not exceeding $33, and (iii) prohibits lenders from using multiple agreements to obtain more finance charges than would otherwise be permitted. Plaintiffs allege that by imposing a finance charge that purports to be justified by the $33 exception to the general 36% limitation on a series of two-week loans -- producing finance charges in the hundreds of dollars and an effective annual percentage rate in triple digits -- the lenders violated the rate restrictions in the Indiana Uniform Consumer Credit Code.

A survey conducted by the Indiana Department of Financial Institutions disclosed that the average payday loan borrower "rolls over" her loan about 10 times, so that the loan actually remains outstanding for 5-6 months (5,350 borrowers obtained 54,508 loans and rollovers, with the average loan/ rollover lasting 13.67 days). The average annual percentage rate was 498.73%, or more than 10 times the 36% maximum. The average finance charge was $27.29 for each loan or rollover, showing that the lenders tried to use the $33 exception on each loan/ rollover. One borrower "rolled over" her loan 66 times, or for about three years. A survey conducted by the Illinois Department of Financial Institutions produced similar results. "Payday lenders" are thus well aware of the fact that borrowers generally cannot pay their loans off in two weeks.

The complaints also allege violation of another Indiana statute that makes it unlawful to charge more than 72% interest in any case. Ind. Code, 35-45-7-2. This statute was the subject of the Attorney General's recent opinion.

Finally, each lawsuit alleges failure to comply with the disclosure requirements of the federal Truth in Lending Act and the Indiana Uniform Consumer Credit Code.

Similar lawsuits are pending against Ace Cash Express, E-Z Payday Loans, Advance America, Fast Cash USA, Check Into Cash, All Checks Cashed, and GRT, Inc. (A-1 Payday Loans and Castleton Cash Advance) in the federal courts in Indianapolis and Hammond. Rowings v. Ace Cash Express, Inc., IP 99-1887-C-B/S (S.D.Ind.); Livingston v. Fast Cash USA, Inc., IP99-1226 C-B/S (S.D.Ind.); Rowings v. DSA, Inc., d/b/a E-Z Payday Loans, IP 00-0060-C-B/S (S.D.Ind.); Wallace v. Advance America, 2:00CV123JM (N.D.Ind.); Wilson v. Check Into Cash of Indiana, LLC, IP00-0166C-H/G (S.D.Ind.); Smith v. All Checks Cashed, Inc., IP00-0165C-T/G (S.D.Ind.); Hudson v. GRT, Inc., IP00-0163C-M/S (S.D.Ind.).

Edelman, Combs & Latturner concentrates in the representation of consumers against lenders, car dealers, debt collectors, and other businesses. The firm has sued numerous "payday lenders" in Illinois, Indiana and elsewhere.

ANOTHER INDIANA PAYDAY LENDER SUED

The Chicago law firm of Edelman, Combs & Latturner and Indiana attorney Lemuel Stigler have filed a class action lawsuit against another Indiana "payday lender," Koach's Kash Station.

The complaints in this and the prior cases allege violation of the Truth in Lending Act and Indiana law in connection with "payday loans." The Koach's Kash Station case was filed in the federal district court in South Bend. Roberts v. Koach's Kash Station, 3:00CV77 (N.D.Ind.).

Finally, each lawsuit alleges failure to comply with the disclosure requirements of the federal Truth in Lending Act and the Indiana Uniform Consumer Credit Code.

Similar lawsuits are pending against Ace Cash Express, E-Z Payday Loans, Advance America, Hoosier Check Cashing of Ohio, Ltd., Check 'n Go of Indiana, Inc., Fast Cash USA, Check Into Cash, All Checks Cashed, and GRT, Inc. (A-1 Payday Loans and Castleton Cash Advance) in the federal courts in Indianapolis, South Bend and Hammond. Rowings v. Ace Cash Express, Inc., IP 99-1887-C-B/S (S.D.Ind.); Livingston v. Fast Cash USA, Inc., IP99-1226 C-B/S (S.D.Ind.); Rowings v. DSA, Inc., d/b/a E-Z Payday Loans, IP 00-0060-C-B/S (S.D.Ind.); Wallace v. Advance America, 2:00CV123JM (N.D.Ind.); Wilson v. Check Into Cash of Indiana, LLC, IP00-0166C-H/G (S.D.Ind.); Smith v. All Checks Cashed, Inc., IP00-0165C-T/G (S.D.Ind.); Hudson v. GRT, Inc., IP00-0163C-M/S (S.D.Ind.); Bonds v. Hoosier Check Cashing of Ohio, Ltd., 3:00CV70 (N.D.Ind.); Niblack v. Check 'n Go of Indiana, Inc., 3:00CV72 (N.D.Ind.).

February 15, 2000, Tuesday INDIANA, MICHIGAN, MISHAWAKA,
PHM, TRIBUNE

SECTION: BUSINESS, Pg. b8

LENGTH: 603 words

HEADLINE:Payday loan suits touch area lenders Complainants seek class-action status against businesses

BYLINE: NICOLE DURAN; Tribune Staff Writer To reach Nicole Duran:
nduran@sbtinfo.com (219) 235-6173

BODY: SOUTH BEND -- Three lawsuits have been filed in federal court against
check-cashing businesses with local offices.

The Chicago law firm of Edelman, Combs & Latturner, and Merrillville attorney
Lemuel Stigler, are seeking class-action status against Check-N-Go, CheckSmart
and Koach's Kash Station for alleged violations of the Truth in Lending Act and
state law.

The lawsuit represents the latest in a string of legal actions aimed at the
"payday loan" industry. The businesses advertise as lenders that will float
people loans until their next payday.

In return, the institutions hold personal checks from the borrowers that are
postdated a week or two. The checks are written for the original loan amount
plus a fee of up to $33. Most loans are for $300 or less.The suits allege the
store-front bankers know clients cannot pay off the loans in time and will
"rollover" the principal, ultimately paying more in interest than the law
allows.

Under the Indiana Uniform Consumer Credit Code, lenders cannot charge more
than 36 percent annual interest or $33, whichever is greater.

But the continual rollover of short-term loans at $33 each time exceeds those
limits, the suit alleges.

According to the Indiana Department of Financial Institutions, the average
client rolls a loan over approximately 10 times.

The payday loan industry says it recognizes the dangers of rollovers.

It lobbied for a law that would have banned rollovers last year, said Randy
Speicher, president of the Indiana Deferred Deposit Association.

"It can turn into a long-term trap, and we don't want to see that happen,"
Speicher said.

Jim Frauenberg, spokesman for CheckSmart, said individual payday lenders
could choose to eliminate rollovers, but without a law it would become a
competitive disadvantage.

However, members of the industry's national trade association, including
CheckSmart, must limit the number of rollovers to four.

CheckSmart is putting that practice into effect.

The Indiana Department of Financial Institutions recently examined 47 payday
lenders and found the average annual percentage rate (APR) being assessed was
almost 500 percent because of the short duration of the loans.

"In little time, this series of charges can amount to an annual percentage
rate that would make a loan shark blush," outgoing Attorney General Jeff
Modisett said in issuing his January opinion that payday lenders are not exempt
from loan-sharking laws.

The industry has filed a suit in Marion County Superior Court to keep the
Indiana Department of Financial Institutions from acting on his opinion that
payday lenders are subject to loan-sharking laws. If his opinion stands, lenders
in violation of the laws could lose their licenses.

The complaints filed in South Bend allege the institutions violated the
loan-shark laws by assessing interest greater than 72 percent, which amounts to
loan-sharking.

The industry has long said it does not charge interest, but rather fees--fees
allowed under a 1994 Indiana law.

The question of whether that law, which allows financial institutions to
charge up to $33, supersedes the loan-sharking laws is the heart of the
industry's lawsuit, Speicher says.

"If it doesn't, then why was it written?" he asked.

Finally, the South Bend lawsuits claim the lenders did not comply with the
Truth in Lending Act's requirement to disclose the APR to customers.

Check-N-Go corporate officials could not be reached for comment.

The owner of Koach's Kash Station said he was unaware a lawsuit had been
filed against his business.

GRAPHIC: Tribune Photo/SANTIAGO FLORES
CheckSmart is one of the three quick-cash companies named in lawsuits filed in
federal court for allegedly charging exorbitant interest rates.

LOAD-DATE: February 21, 2000

February 25, 2000, Friday

SECTION: Appellate Summary; Pg. 1

LENGTH: 446 words

HEADLINE: Debt collection - notice requirements

SYLLABUS: Magistrate judge erred in summarily dismissing plaintiff's claim for violation of Fair Debt Collection Practices Act on basis that plaintiff would not be confused by defendant's collection letter; an unsophisticated consumer could have been confused by letter, and dismissal therefore was improper.

BODY: The 7th U.S. Circuit Court of Appeals has reversed a ruling by U.S. Magistrate Judge Morton Denlow of the Northern District of Illinois.

Plaintiff Margaret Walker received a collection letter from defendant National Recovery Inc. stating that she had a past-due balance of $ 4,130 with Commercial Credit. The defendant in its letter to the plaintiff did not demand prompt payment" or an immediate call" but did say that the account had been placed for immediate collection" The letter did not explain how collection could be immediate" unless payment was made immediately.

Notices to debtors must not confuse them about the verification rights established by the federal Fair Debt Collection Practices Act. The magistrate judge dismissed the complaint, concluding that the letter would not confuse its recipient. The judge said the use of the expression immediate collection" in the defendant's collection letter did not conflict with the debtor's statutory right to dispute the validity of the debt within 30 days.

The appeals court reversed. The court said that by concluding there was no possibility of confusion as a matter of law, the magistrate judge disregarded the letter's actual effect on unsophisticated consumers.

Whether a given message is confusing is ... a question of fact, not of law or logic," the 7th Circuit said.

The appeals court said that when the evidence is one-sided, it is possible to end the case by summary judgment. But a complaint that presents a claim turning on factual issues and inferences -- as this case does -- may not be summarily terminated.

The plaintiff sought to show that regardless of how lawyers read the collection letter, unsophisticated readers would be confused by it.

It is possible to imagine facts that would support this conclusion," the appeals court said. Perhaps a survey would show that four out of five high school dropouts would take the reference to immediate collection' to demand immediate payment' notwithstanding the statutory time to request verification."

A judge may not toss out" a complaint just because the judge believes that proof is unlikely to be forthcoming, the appeals court said. The plaintiff may fail in her attempt to show that the letter confuses unsophisticated recipients, but it still is possible to imagine evidence consistent with the allegations of the complaint that would establish confusion, the court said.

Margaret Walker v. National Recovery Inc., No. 99-2119. Judge Frank H. Easterbrook wrote the court's opinion with Judges Kenneth F. Ripple and Diane P. Wood concurring. Released Dec. 21, 1999. (8 pages) 0077

LANGUAGE: ENGLISH

February 23, 2000, Wednesday

SECTION: Pg. 1

LENGTH: 750 words

HEADLINE: 7th Circuit panel reverses itself on debt-collection ruling

BYLINE: PATRICIA MANSON; Law Bulletin staff writer

BODY: Saying they were outnumbered, three federal appeals court judges have reversed their earlier conclusion that the interpretation of dunning letters may be left to jurists rather than juries.

In an opinion Tuesday, a panel of the 7th U.S. Circuit Court of Appeals said whether a debt-collection letter is confusing to the unsophisticated consumer is a question of fact.

Panel members last fall had determined that the question was one of law rather than fact.

But they reversed themselves Tuesday after noting that a majority of their colleagues on the 7th Circuit bench favor a different approach to the interpretation of dunning letters.

That approach entitles debtors to present empirical evidence that might show that a particular letter creates confusion in the unsophisticated consumer, the panel said.

The panel's decision cleared the way for Jewel Marshall-Mosby to pursue her lawsuit against Corporate Receivables Inc.

The suit claimed Corporate Receivables violated the Fair Debt Collection Practices Act, 15 U.S.C. sec1692, with a letter seeking payment of a past-due debt Marshall-Mosby allegedly owed.

In January 1999, U.S. District Judge Ann Claire Williams -- who has since taken a seat on the appeals court -- dismissed the suit under Rule 12(b)(6) of the Federal Rules of Civil Procedure for failure to state a claim on which relief may be granted.

The 7th Circuit panel affirmed Williams' decision in an Oct. 14 opinion that held that courts may determine as a matter of law whether a dunning letter is confusing.

The panel also held that dismissal under Rule 12(b)(6) is proper if a court concludes that the letter cannot reasonably be judged confusing."

Marshall-Mosby v. Corporate Receivables Inc., 194 F.3d 830 (1999).

But two months after the panel issued its decision, a different 7th Circuit panel reached a different conclusion in a case raising the same issues addressed in Marshall-Mosby's case.

The panel in Walker v. National Recovery Inc., 1999 WL 1257386 (Dec. 21, 1999), held that whether a debt-collection letter is confusing to the unsophisticated consumer is a question of fact rather than law.

The panel said a consumer should have an opportunity to explore that question at trial with the aid of testimony and consumer surveys -- not by asking a federal judge whether he thinks the letter meets the standards set by the Fair Debt Collection Practices Act.

Under that approach, according to the panel, complaints filed under the act survive a motion to dismiss under Rule 12(b)(6) merely by claiming that a dunning letter was confusing.

A majority of the active judges on the appeals court bench voted under Circuit Rule 40(f) against rehearing the Walker case en banc.

With that vote, according to the panel in Tuesday's opinion in Marshall-Mosby's case, the original decision in this case was rendered inconsistent with the approach approved by a majority of the court."

The panel said the Walker opinion prompted it to vacate its Oct. 14 decision in Marshall-Mosby's case and grant rehearing.

And the Walker opinion -- as well as the approval of that opinion by a majority of the 7th Circuit judges -- also apparently prompted the panel to reverse its position on the interpretation of dunning letters.

The panel noted that Marshall-Mosby, like Margaret Walker, had alleged that a dunning letter she received was confusing.

Under Walker, her complaint was thus legally sufficient and survives a motion to dismiss under Rule 12(b)(6)," Judge Michael S. Kanne wrote for the panel.

The panel reversed Williams' decision to dismiss Marshall-Mosby's suit and sent the case back to the lower court for further proceedings.

Jewel Marshall-Mosby v. Corporate Receivables Inc., et al., No. 99-1217.

Joining in the opinion written by Kanne were Judges William J. Bauer and Terence T. Evans.

Kanne and Evans, along with Judge Daniel A. Manion, had voted to rehear the Walker case en banc. Williams did not take part in that vote.

On Wednesday, Chicago attorney Stephen R. Swofford, who represents the defendant in the Walker case, said his client has not yet decided whether to seek review before the U.S. Supreme Court.

Walker and Marshall-Mosby represent such a fundamental change in procedure that I think it's something the Supreme Court might be interested in," Swofford said.

LANGUAGE: ENGLISH

LOAD-DATE: February 24, 2000