Arkansas Attorney General To Payday Lenders: Shut Down Or I'll See You In Court

On March 18, Arkansas Attorney General Dustin McDaniel sent letters to 156 payday lenders, ordering them to stop issuing new loans and void any current and past due loans or face legal action. McDaniel charges that the lenders are violating Arkansas’s constitutional prohibition against usurious interest rates.

A provision in the Arkansas state constitution limits the allowable interest rates on loans and consumer credit transactions. According to Article 19, Section 13, the maximum allowable amount for general loans “shall not exceed five percent (5%) per annum above the Federal Reserve Discount Rate at the time of the contract.” Any contracts that charge higher interest will be void as the interest. The consumer loan provision is even better: “All contracts for consumer loans and credit sales having a greater rate of interest than seventeen percent (17%) per annum shall be void as to principal and interest and the General Assembly shall prohibit the same by law.” Payday lenders have apparently been operating under an industry-written “Arkansas Check-Cashers Act” that called payday loan interest rates “fees,” exempting them from the usury provision and allowing lenders to charge interest rates “fees” of up to 300 percent. The Arkansas Supreme Court has issued several rulings holding parts of the law unconstitutional and labeling payday lending as “unconscionable and deceptive,” and appears to have McDaniel’s back. In response, the payday lending association in Arkansas spouted the typical “Hey, at least it’s better than paying overdraft fees and pawning your wedding ring” line.

AG McDaniel Orders Payday Lenders to Cease Operations or Face Action [Arkansas Business]
Arkansas Constitutional Provision on Maximum Interest Rates [Arkansas Secretary of State]
(Photo: ninjapoodles)

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  1. djanes1 says:

    so, why doesn’t this happen, you know, in every state?

  2. ShortBus says:

    “All contracts for consumer loans and credit sales having a greater rate of interest than seventeen percent (17%) per annum shall be void as to principal and interest and the General Assembly shall prohibit the same by law.”

    I doubt this applies to credit cards issued by out-of-state banks (BoA, CapOne, etc) due to that interstate commerce clause fun. yay!

  3. TruPhan says:

    Sounds like a win for the good guys =D

  4. Buran says:

    @ShortBus: Good point. Anyone know the answer to that one?

  5. valarmorghulis says:

    @ShortBus: I would agree, this would probably apply to loans issued from AR rather than being dependant on the loanee’s location.

  6. Blinker says:

    This is asinine. Its not the governments job to tell people how much they should pay for something. Its called personal responsibility. If people are stupid enough to take out one of these loans then that is their OWN fault. If people didnt take out these loans then there wouldnt be a demand for them and the companies would go out of business. Im so sick and tired of the government constantly trying to protect people from their own stupidity. Whatever happened to personal freedom in this country

  7. GearheadGeek says:

    @Blinker: You’re free to send as much of your money as you’d like to payday lenders in Arkansas… they’re just not able to force you to do it.

  8. bnb614 says:

    @Blinker: Agreed! The interest rate could be 900% and it wouldn’t effect me because I am not going to get extorted in order to get a few bucks. Oh I know, some people can’t help it. Cry cry.

    Too many Attorney Generals have decided that the Spitzer way of sue everyone, hostile business environment, is the way to go. So sad.

  9. Alex Chasick says:

    @djanes1: Yeah, and in Arkansas of all places; incidentally, section 1 of this same article is a provision banning atheists from holding public office or testifying as witnesses.

    (Also, hi Dust.)

  10. Alex Chasick says:

    @ShortBus: Unless there’s a federal regulation saying that payday lenders can charge whatever they want (which there might be), I don’t think interstate commerce affects anything. What would affect it is that most lenders are incorporated in favorable places, like Delaware, so they would make a case to have that law apply.

  11. FrugalFreak says:

    I’m all for protecting consumers from unethical practices. If they are yanking this monetary resource away from those with poor credit, What are they considering replacing it with? something that credit industry is NOT involved in?

    this stinks of corporate industry lobbyist meddling. will banks be prepared to offer bad credit consumers loans? those that use these may not wish to participate in credit industry, I don’t! I don’t support a system where corporations can give me life or take it away based on a number they control.

    I think payday lenders fill a niche to no-credit consumers. and credit banks hate that those citizens don’t have to lose money to them too.

    leave payday lenders alone until you offer something to replace them.

  12. TechnoDestructo says:

    @Alex Chasick:

    Yeah, I was going to say something about Delaware (and the ME-TOO states). I know they can do that with credit cards…but does having a storefront in Arkansas put them under Arkansas law regarding interest rates?

  13. Alex Chasick says:

    @Blinker: Read the article. It’s a provision in the state constitution, which means it was ratified by Arkansans, who apparently disagree with your opinion, not to mention that the provision doesn’t explicitly ban payday lenders; it just limits the interest rates that lenders can charge to a rate that is not profitable for them. The provision also applies to consumer loans that people who aren’t “stupid” might want to take out. Like financing purchases.
    @bnb614: The attorney general has a duty to enforce the state’s laws, and it’s pretty clear that the payday lenders are violating those laws.

  14. ghettoimp says:

    @FrugalFreak: Every business has an obligation to act lawfully. Nobody’s saying you can’t give out payday loans — they’re just saying you have to follow the law when you do so.

  15. FrugalFreak says:

    @ghettoimp:

    but the banks and credit industry knows that payday lenders can’t offer the high risk product at regular risk prices. banks offer loans at regular rate because the people who qualify have low risk and back those loans with property collateral. Payday lenders offer higher risk loans with no collateral beyond postponing collection on the check held. payday lenders should not be clumped together with other lenders that participate in the credit system. it is comparing lemons to pears. and banks and credit industry know payday’s cant offer this high risk with no backing.
    when a bank will loan me small loan with no backing and NOT use a credit report or score then you can rebutt my opinion.

  16. humphrmi says:

    @djanes1: First, to be clear, Arkansas law only applies to loans originated in Arkansas. So why don’t usury laws work in other states? Because Arkansas has gone a step further:

    The Arkansas Supreme Court has issued several rulings holding parts of the law [Arkansas Check-Cashers Act] unconstitutional and labeling payday lending as “unconscionable and deceptive,”

    Most states have not gone that far. Arkansas has basically outlawed payday lending explicitly, and payday lenders continue to operate in the face of that. So they probably do risk going to court over this.

    @Blinker: I agree, to an extent. I care that the Federal government should not intervene in determining what terms myself and one or more other parties can agree to.

    But local regulation is a different kettle of fish. State governments are far better at determining in-state tolerance for usury than the Federal government. This is, in fact, accepted practice … which is why credit card companies operate out of usury-friendly states. But payday loans are not credit cards, they are loans originated in-person, and that’s how they make all their money, which is why regulation makes (a little bit more) sense.

  17. nequam says:

    @Buran: With credit cards, it’s the law of the state from where it is issued. This was a boon especially to South Dakota when it removed its limits on interest. There is a good PBS: Frontline special called “The Secret History of the Credit Card” on the topic. There used to be a federal usury law, but it was repealed following the Great Depression.

  18. Sam2k says:

    I’m glad McDaniel is finally doing something productive.

  19. BigBoat says:

    Seems like Arkansas citizens should be taking out some new loans right quick. Perhaps with 200% interest rates.

  20. theczardictates says:

    @blinker: you don’t think people should be protected from companies who apply all the resources at their disposal, including huge budgets for seductive and deceptive advertising, to take advantage of people who are so desperate to make ends meet that they’ll try anything?

    Unfortunately, not everybody is as smart and well informed as you. Fortunately, some are more compassionate than you.

  21. SomeoneGNU says:

    Though I find payday lenders to be the scum of the earth, it saddens me to see the government intervening where it should not.

    I agree strongly with Blinker’s original post and I think the government would do better in trying to educate consumers more about being fiscally responsible rather than trying to hold their hands every inch of the way.

  22. Alex Chasick says:

    @TechnoDestructo: I’m reaching back to a civil procedure class taught by a moron, but its my recollection that doing business in a state usually subjects you to its laws, unless it can be shown that there’s a better reason to use a different state’s laws. Especially in a face-to-face transaction like what happens in a payday loan, I don’t see any reason to not be subject to Arkansas law. Some contracts include a clause that any disputes will be litigated in the state of the company’s headquarters (and of course will be arbitrated, not litigated).

  23. humphrmi says:

    @SomeoneGNU: As others have pointed out, this isn’t “government intervening where it should not.”

    From the article: “A provision in the Arkansas state constitution limits the allowable interest rates on loans and consumer credit transactions.”

    Constitutions are not decided by lawmakers, they are adopted by the voters, i.e. the residents of the state of Arkansas.

  24. danaseilhan says:

    I love this country. If someone stands up for what’s actually in the Constitution, they get shouted down with a, “Shut up, you whinybaby liberal. Why do you hate America?”

    But when the government does what any government is supposed to do, which is to keep people from out and out harming one another, oh the hue and cry! “But I have a CONSTITUTIONAL RIGHT to charge you three hundred percent interest! I can’t POSSIBLY make any money without it! *sob* WHY DO YOU HATE AMERICA?”

    I don’t buy that three hundred percent interest rates are necessary in order to make a profit off of “high-risk” borrowers. Um, let’s see… anyone with no credit history is technically “high-risk.” Do you really want it set up so that if you have no credit history, you *have* to pay three hundred percent interest?

    Here’s a crazy thought. The Grameen Bank, which lends money to people way worse off than any bad-credit case in the United States, says that it has a 98 percent payback rate from its customers… in places like *Bangladesh.*

    Imagine. And Grameen’s talking about coming to the United States too.

    What payday lenders basically do is what Grameen does, which is issue a microloan to a customer. The difference between a PL and Grameen is that Grameen doesn’t sell your grandchildren into slavery. And yet, amazingly, Grameen makes money. How is that?

    Can we stop standing up for the supposed “right” for people to destroy one another’s lives, please, just any old time now?

  25. dazzlezak says:

    @djanes1:

    There was a good show on Frontline on PBS recently about this subject.

    [www.pbs.org]

  26. Erwos says:

    @humphrmi: Yes, and constitutional enforcement is the province of the government.

  27. aikoto says:

    “”Hey, at least it’s better than paying overdraft fees and pawning your wedding ring” line.”

    Actually, it’s not. I used to overdraw my account on purpose by about $400 as a small loan. The charge was $25 for $400. For the same amount, Payday loan places would charge $100 or more.

  28. Pro-Pain says:

    @aikoto – I used to do this too back when I was a poor college student. Worked like a charm. I always payed it back and I STILL have that same account. I don’t think the bank’s atm will let you do this anymore? Does it?

  29. SkyeBlue says:

    Would that law include the places we have here in Arkansas (not sure if they are in any other states) where you can sign over your car title and have it held for a cash advance? That is REALLY preying on desperate people.

  30. AMetamorphosis says:

    Good – These companies are loan sharks and are a drain on the people who can least afford it.

  31. giggitygoo says:

    Why are we making decisions for other people by banning payday loans? If the government wants to be pro-consumer, pass laws that force companies to make all terms of the loan clear in large print – if people understand the terms and still want to take the loan then who are we to tell them they can’t?

    This country has enough problems without the government (federal and state) wasting time on “protecting” people from themselves.

  32. Shadowman615 says:

    @giggitygoo: They don’t want to ban payday loans, they want to enforce a law that bans extremely high interest rates.

  33. giggitygoo says:

    @shadowman615

    Isn’t that in effect the same thing? The short term nature of payday loans mandates high interest rates to sustain any kind of business. So if you ban high-interest loans you ban payday loans.

  34. @Alex Chasick: Apparently @blinker believes that the stupid should be weeded out, Darwin style. I’ve noticed a lot of social Darwinist sentiment on Consumerist lately, and it makes me wonder what this site is really all about. Is it Free Republic masquerading as a consumer advocacy site? If so, I’ll be saying goodbye now.

  35. SkyeBlue says:

    @giggitygoo: This country has enough problems without the government (federal and state) wasting time on “protecting” people from themselves.

    I think in many cases you might be correct, but in regards to these payday loans I have to disagree. If many people COULD go to other places to get the money they would. I could use my neighbor as an example. She is on Social Security and confided in me about having to go to one of those palces to write a postdated check. Do you think her bank would have loaned a woman who lives on about $700.00 a month any money? I dont think so. She needed money and I think she was too embarrassed to ask her kids for any help so she went to one of those cash advance places instead. Which the next month left her with even less money to live on. Alot of people can’t just go to a bank in an emergency and get a quick loan because of bad credit, or no credit.

    It’s not about people just seeking to make bad choices and the government needing to “protect people from themselves”. It is about the State of Arkansas doing what is right and protecting people form these predatory lenders who prey on the people who are most in need. I doubt very many well off people frequent these type of places.

  36. econobiker says:

    @SomeoneGNU: Problem is that the government should protect its citizens from internal threats such as usury also. (The same way the government tries to protect its people from drugs, lead in gas, lead in paint, true fully automatic weapons, bad pharmacuticals, tainted meat, etc) Many states overturned the usury laws back in the late ’80s early ’90s with help from- drum roll- lobbiests for the payday lending industry…

    …Payday lending did cut into the illegal loansharking industry like the lottery cut into the numbers games.

    Government by the corporations, for the corporations.

  37. giggitygoo says:

    @SkyeBlue

    I see your point, and agree that many people do make their financial situations even worse by utilizing payday loans. I certainly hope I’m never in a position where I need to use one. The problem with that line of reasoning is that it doesn’t address the primary point – the government is attempting to protect people from themselves. It’s not “predatory” if the consumer understands the terms and willingly takes the loan. Your neighbor’s situation is certainly unfortunate and all too common, but if we made laws to prevent any kind of situation where someone could get themselves in trouble where would we be as a “free” nation? Should the government ban lower income people from buying plasma TVs or expensive cars? While poor people definitely shouldn’t buy those things, (just like your neighbor shouldn’t get a payday loan she cannot repay) I don’t want to see the government forcing people to live a certain way; and I think most people would agree that’s not the government’s job.

    That being said, I would like to see the government crack down on dishonest lenders who do not make loan terms clear and explain them in plain English.

  38. Shadowman615 says:

    @giggitygoo: Yeah, I’m crying a river for the poor payday loan shops who can’t sustain themselves on reasonable interest rates. If the business can’t survive without breaking the law, it doesn’t sound like a legitimate business. Why should the government change the law to help keep them in business?
    Payday loan establishments are not mom and pop stores supporting the local economy, they are generally backed by larger banks like Wells Fargo and BoA. They are a leech on the communities where they reside.

  39. giggitygoo says:

    @shadowman615

    No one is advocating any pity for payday companies. I personally don’t really care about this specific issue at all, as I never plan on using a payday loan. I’m more concerned with the nanny-state ideology that demands government protect people from the consequences of their own decisions.

    The payday companies wouldn’t even be in business if people didn’t willingly use them – personally I’d love to see the nation’s financial acumen improve to the point where every payday shop went belly up due to smarter decision making. (Unlikely as it is) Until then, shouldn’t the government focus on dishonest business practices rather than telling people what is in their best interest?

  40. taka2k7 says:

    Why is it when the gov’t takes a proactive stance it’s “not the role of government to protect people from their own decisions”?

    This is the government enforcing the law. The governments role should be to protect the least fortunate, not protect greedy corporations.

    Sometimes I wish all companies would take Google’s stance of “Do no harm”. Sure it wouldn’t be enforceable and Google isn’t perfect, but deliberately taking advantage of people is totally unethical. Yes, companies should be able to earn a profit for a decent service or product, but payday loans are crap.

  41. whanghpo says:

    hurrah,hurrah,hurrah……

  42. m4ximusprim3 says:

    @Steaming Pile: Another weak one bites the dust. Bye!

    Poster empathy level darwinism FTW.

  43. HappyCthulhu says:

    @giggitygoo

    Exactly what part of CONSTITUTIONAL PROVISION do you not understand.
    We, the citizens of the great state of Arkansas, VOTED for this provision.
    We, the citizens of the great state of Arkansas, decided that we, the citizens of the great state of Arkansas, didn’t want these payday lenders practicing predatory lending on our less fortunate citizens.
    This isn’t Big Government coming in and deciding what is best for us.
    This is the citizens of the great state of Arkansas deciding what is best for us.

  44. Poshua says:

    ‘According to Article 19, Section 13, the maximum allowable amount for general loans “shall not exceed five percent (5%) per annum above the Federal Reserve Discount Rate at the time of the contract.” ‘

    Am I reading this right? The current Federal Reserve Discount Rate is 4.5%. Does that mean you can’t make a loan in Arkansas with a rate higher than 9.5%?

  45. jswilson64 says:

    So, the Arkansas Payday Lenders weren’t smart enough to delineate “fees” from “interest” ? Or did the Arkansas courts decide the “fees” were in actuality “interest” ?? And how do Pawn Shops get away with charging their usurious “interest” and “fees” in Arkansas?

  46. @Blinker: by the logic that there shouldn’t be laws prohibiting people from getting a stupidly high interest rate on loans like this, we also should not have safety regulations because, hey, people that let their kids eat that lead paint should have known better.

  47. FrugalFreak says:

    @giggitygoo:

    That is my point. why does it bother people so much that someone with bad credit can still get the funds they need? Is it a bit of envy maybe? Could it be you are still caught dealing with credit industry playing you like a puppet? Why does it offend so many that people with less income have equitable resources? anyone care to answer?

  48. DarwinAward says:

    Government Big Daddy will save you – NOT

    If the government prevents these people from giving their money away like this, they will find another way,,

    Pawn Shops charge more, that would be a good choice for them.

    Bank Overdraft charges are LOTS more, that would finish them off even faster.

    GO Darwin GO

    JLFS

  49. zekezarski says:

    There seems to be a misunderstanding about how these various lending activities are conducted. Interest rates on credit cards are set based upon where the bank is “chartered”, ie, incorporated. Each state may establish a maximum rate for all banks chartered in their state. I live in Texas and the maximum credit card rate is 14.9% for banks chartered here.

    Many years ago (20?) there was a US Supreme Court opinion that basically said that banks which operate across state lines may “export” there rates to other states. (I don’t recall whether this was a supremacy clause case or an interstate commerce case, but it was one or the other or both.) The result is that a bank chartered in Delaware or South Dakota may issue credit cards to Texas residents with no limit or very high limits on interest rates.

    Most payday loans are not “face to face” even though the borrower goes into a store front to get the loan. The entity in the store front is really a “credit service organization.” (“CSO”) They only service the loan, they do make the loan. The actual lender is typically far away. For instance, I routinely see payday loans where the CSO is EZ Cash or a similar entity and the actual lender is NCP Limited Partnership out of Dayton, OH. The borrower never realizes this because they do not review the pages of fine print.

    The truly scary part is that these loans apparently have no real limit on interest rates. I routinely see loans with a stated interest arte of 800% or more. My personal record was a client with a stated interest rate of 1227%. (That’s right folks, ONE THOUSAND+ percent.)

    One of the problems we see increasing here is debt collection violations where the CSO’s which collect the loans violate debt collection laws. I regularly have clients report that CSO’s have threatened to have them arrested because they authorized the lender to draft their bank account and they either stopped payment or closed the account. The CSO now says that constitutes theft by check, which is a flat out lie, at least in Texas.

    Consumer protection laws are enacted to protect the lease sophisticated from the most sophisticated. I am a consumer bankruptcy attorney. It never ceases to amaze me that whenever one of my debtors does something wrong, the lender will contend that they were some sort of criminal mastermind out to defraud the bank. When the bank (with its in house legal department) violates the law, the response is always it was an honest mistake so you shouldn’t penalize us. How convenient to always be in the right.

  50. Oh I think that Mr. Dustin McDaniel is a bit harsh here. There is no need to close the lenders as they can think of a better option like restricting these lenders from taking a high rate of interest. Afterall these lenders are rising because people have faith in them. So better to opt for a midway path which fulfills expectations….