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]