Articles

Payday Loan Law Goes To The Courts

Rhonda Cook, AJC Staff
Atlanta Journal-Constitution
April 26, 2004

A 100-year-long fight over money moves Tuesday from the Georgia General Assembly to the federal courts in Atlanta.

On one side are almost 30 lawyers, representing the multibillion-dollar industry that makes short-term, high-interest loans. Eight law firms, including some of the biggest and most prestigious in Atlanta, supply that legal firepower.

On the other side are the state and attorneys for seven groups that advocate for the elderly and consumers, mostly the working poor.

There were several hearings in the past two years as the General Assembly moved to crack down on payday loans.

Advocates for the working poor and the elderly appeared before legislative committees with heart-breaking stories of how a loan of just a few hundred dollars to cover an unexpected car repair or medical expense quickly became a debt of thousands, and, sometimes, tens of thousands, of dollars.

The military got involved and at one committee meeting several base commanders pleaded with lawmakers for help. They claimed the payday lending practice compromised the military as enlisted men in serious debt risked losing their security clearances and being discharged.

The industry hired freelance lobbyists who work the Capitol's halls and reinforcements flew in from other states as the bill moved toward its final passage.

How much was spent on lobbying against the law is unknown; state law does not require special interest groups to reveal how much they spend.

With one of the nation's strongest laws now on the books in Georgia, the industry is taking a new tactic, through the courts.

More than 2,000 pages of documents have been filed since the first two federal lawsuits were filed the day Gov. Sonny Perdue signed the bill into law three weeks ago.

"Can you imagine how much money is being spent?" Jean Ann Fox asked. Fox is with the Consumer Federation of America, one of the groups that has filed arguments in the four separate lawsuits to be discussed Tuesday morning.

All four lawsuits before U.S. District Court Judge Marvin Shoob claim that Georgia's latest effort to stop payday lending is unconstitutional because it interferes with the practice of businesses partnering with banks in another state.

Nationwide implications

But the question Shoob considers this week is whether he should temporarily enjoin enforcement of the new law, which takes effect Saturday. The law threatens serious prison time and fines for those who make "payday loans" with interest rates of 300 percent, 600 percent, 900 percent and even higher.

This is a very important case, not just for Georgia, but for the industry nationwide, Fox said. One of the issues is whether banks in states with no cap on interest can import those rates into Georgia, where the criminal usury limit is 60 percent.

Stephen Benjamin of the Consumer Finance Services Association of America, which represents some of the larger payday lenders, says Georgia's new law is unconstitutional. It will deprive the working poor, including many people in the lower ranks of the military, of a needed service -- a few hundred dollars to carry them over to the next payday, Benjamin says.

"Our position is ... a majority of state legislatures in this country have spoken on this product and have decided consumers in their states should have access to this product," Benjamin said. Thirty-five states and the District of Columbia regulate the practice, also known as payday advance, wage buying and salary buying.

The industry insists the new law will "put 2,000 people out of work in ... tough economic" times and that payday loans are "a legitimate product that meets a real need."

The businesses offer as much as $500 in cash for a fee that sometimes reaches $25 per $100.

Cash loans are made in exchange for a post-dated check, although borrowers sometimes also are required to buy telephone calling cards or coupons for overpriced catalog items, which adds to the lender's profits.

And when the debt cannot be paid the loan is renewed, which means more fees are incurred. Quickly, the consumer is looking at paying thousands of dollars for a loan of only a few hundred dollars.

"There's a lot of money to be made from being able to charge unlimited interest rates to cash-strapped consumers [who need] quick money," consumer advocate Fox said. "Payday lenders are lending $40 billion a year in loans bringing in $6 billion in revenue from consumers."

The argument

Payday lending has been illegal in Georgia for decades. Georgia lawmakers first tried to regulate it in 1904.

When that didn't work, the Legislature took the recommendations of a special commission in 1953 to scrap the existing "salary buying" statutes, which should have put the payday lenders out of business. But payday lenders continued to ignore the law and their businesses prospered since prosecutors did not put a high priority in pursuing violators because punishment was weak.

But this session, the Georgia Legislature passed what is believed to be the nation's toughest law prohibiting payday lending.

Senate Bill 157, which Perdue signed two days after the April 7 close of the Legislature, lays out tough criminal penalties. It makes the otherwise unenforced misdemeanor a felony.

At a minimum, a payday lender risks a year in prison and a fine of $5,000 for the first two convictions and five years in prison and a fine of $10,000 for a third. But racketeering charges also can be brought with a possible 20 years in prison and fines of $25,000 per transaction. The new law gives consumers the power to bring class-action lawsuits for substantial monetary awards.

The new law also lays out specific protections for members of the military.

According to the law, payday lenders cannot hide behind their partnerships with banks based in such states as North Dakota and Delaware that have no interest rate caps.

But the companies that sued -- Advance America, Credit Corporation of Georgia, Express Check Advance and Cash America -- argue that they cannot be restricted by Georgia's interest cap because they are doing the business of out-of-state banks governed by the Federal Deposit Insurance Act.

The payday lenders claim that they are acting as an "agent" for the bank and are immune from state usury laws.

Similar lawsuits have been filed in other states, but those cases are in the state courts. Because the Georgia lawsuits are in federal court, the outcome could expand beyond this state's borders.

"There's been a lot of discussion about whether state banks, because they are federally insured, have the right to export their interest rates," Fox said. "You could get the definitive decision in this case as to whether states can protect themselves from loans made by local companies partnered with out-of-state banks."

Reprinted with permission from The Atlanta Journal and The Atlanta Constitution. Further reproduction, retransmission or distribution of these materials without the prior written consent of The Atlanta Journal and The Atlanta Constitution, and any copyright holder identified in the material's copyright notice, is prohibited.