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May 2000 / Post-dated Checks May Secure High-cost Loans

Copyright 2000 LRP Publications Consumer Financial Services Law Report

May 1, 2000

SECTION: Vol. 3, No. 20

LENGTH: 572 words

HEADLINE: Post-dated checks may secure high-cost loans

BODY: A payday lender’s security clause purporting to secure the borrower’s interest in “any monies, credits or other property” may violate the Truth in Lending Act because it is overbroad and does not disclose the borrower’s post-dated check, which is a valid security interest under the TILA. (Mitchem v. American Loan Company Inc., et al., No. 99 C 1868 (N.D. Ill. 3/17/00).)

Marguerite Mitchem obtained three payday loans from American Loan Company Inc. For each of the loans, Mitchem borrowed 300 at an annual percentage rate of 521.4 percent and provided American with a post-dated check as security. She signed a disclosure statement that listed the APR, a finance charge of 60, a payment schedule and a security clause. The security clause stated: “You are giving a security interest in any monies, credits, or other property of yours in possession of the creditor on deposit or otherwise.”

Mitchem sued American in the U.S. District Court for the Northern District of Illinois, alleging that the security clause improperly disclosed the security interest in violation of the TILA. She contended that the agreement did not specify American’s security interest in her post-dated check. In addition, Mitchem claimed that the clause may be incorrectly interpreted as giving American a security interest in all her money and property, wherever located.

American moved to dismiss, claiming that Mitchem failed to state a TILA cause of action because it is not possible to claim a security interest in a post-dated check.

The court observed that the TILA requires a creditor to provide a disclosure statement when it takes a security interest in “either the property purchased as a part of the transaction, or the property not purchased as part of the credit identified by item or type.” It also noted that Regulation Z defines a security interest as “an interest in property that secures performance of a consumer credit obligation and that is recognized by state or federal law.”

7th Circuit precedent

In a case with “extremely similar alleged facts to the present case,” the 7th U.S. Circuit Court of Appeals examined the definition of a security interest in determining a violation of the TILA. The court said that in Smith v. Cash Store Management Inc., 195 F.3d 325 (7th Cir. 1999), the 7th Circuit held that a creditor can have a security interest in a post-dated check and must disclose that interest as required under the TILA. (See Consumer Financial Services Law Report, Dec. 24, 1999, p.11.) PAGE 9 Consumer Financial Services Law Report May 1, 2000

In applying the reasoning of the 7th Circuit to this case, the District Court agreed that a post-dated check has value to the creditor in the event of a default beyond the value of the loan agreement because a holder of both the loan and the check has remedies available to it that a holder of only the loan agreement does not. The court determined that Mitchem made adequate allegations that American’s security clause violated the TILA by not disclosing the post-dated check.

Overbroad disclosure

The court also found merit to Mitchem’s argument that the security clause violated the TILA because it purported to secure an interest in all of Mitchem’s “monies, credits or other properties.” Judge Coar stated that an overbroad disclosure of a security interest may also violate the TILA.

The District Court denied American’s motion to dismiss Mitchem’s TILA complaint.