6th Circuit Reverses Dismissal of Payday Loan Breach of Contract Suit

On May 22, 2019, a panel of Sixth Circuit judges reversed the district court’s dismissal of breach of contract claims—filed by short-term loan borrowers against their bank—ruling instead that the contract which governed the loans included two inconsistent definitions of APR. 

The bank offered a short-term lending program for certain customers who held eligible checking accounts.  Because the bank—as both lender and bank—had direct access to borrowers’ checking accounts, it deposited short-term loans straight into participating borrowers’ accounts, “then paid itself back automatically—plus a 10% transaction fee”—“after a direct deposit posted or 35 days elapsed, whichever came first.”  The contract governing the program disclosed the annual percentage rate (APR) as 120%. Plaintiffs—who all obtained loans through the program and paid them back fewer than 30 days later—argue that the 120% figure is “false and misleading” and, when it is calculated using “a more conventional method” in which the APR is tied to the length of the loan, the “APR is actually as high as 3650%.”

The complaint alleges that the bank “breached the contract by failing to provide an accurate APR summary for [the short-term loans] on monthly bank statements.”  The district court dismissed the breach-of-contract claim, holding that the contract unambiguously disclosed the method for calculating APR.  However, the district court admitted that the result of such calculation “may be misleading.”  The Sixth Circuit reversed this dismissal, finding that the contract was ambiguous because it provided conflicting descriptions of “APR.”  The first description was a definition, copied from a federal regulation that describes the APR as being “expressed as a yearly rate”; and the second was the method used to calculate APR, “which [was] not based on a year or any time period.”  The APR calculated by the second description was “always 120%, regardless of the length of the loan.”  The circuit panel held that this ambiguity raises a question of fact, and accordingly, reversed and remanded the matter to the district court.