In addition to demanding payday lenders cease their
lending practices immediately, McDaniel also demands they "void any and all
current and past-due obligations of their borrowers, and refrain
from any collection activities related to these type loans." A
failure to do so he says, will likely result in the filing of a
lawsuit.
"It is my hope that they comply with my demand but, if they do
not, I stand ready to take them to court," McDaniel said.
According to records of the Arkansas State Bard of
Collection Agencies (name of business) is currently engaged
in the trade commonly known as "payday" lending. for the
purposes of this letter, "payday" lending means the practice
of extending short-term loans at relatively high annual
percentage rates. The definition includes, but is not
limited to, the practice described as a "deferred
presentment option" as defined in Ark. Code Ann. 23-53-102.
The purpose of this letter is to advise you regarding the
law in Arkansas as it applies to payday lending. Arkansas
has a strong public policy against usury. Article 19,
Section 13 of the Arkansas Constitution places a cap on the
maximum interest rate that may be charged a borrower in a
lending transaction:
(a) General Loans:
(i) The maximum lawful rate of interest on any contract
entered into after the effective date hereof shall not
exceed five percent (5%) per annum above the Federal Reserve
Discount Rate at the time of the contract.
(b) Consumer Loans and Credit Sales: All contracts for
consumer loans and credit sales having greater rate of
interest than seventeen percent per annum shall be void as
to principal and interest and the general Assembly shall
prohibit the same.
To the extent that your organization may have relied upon
licensure under the the Arkansas Check-Cashers Act of 1999
as a defense against usury, which is prohibited by the
Arkansas Constitution, and claims under other applicable
Arkansas laws; we believe that such reliance has been
misplaced.
Stating with the case of
Luebbers v The Money Store, 344 Ark. 232, 40 S.W. 3d 745
(2001), the Arkansas Supreme Court has addressed the
conflict between the Arkansas Check-Cashers Act and the
Arkansas Constitution. he Court ruled that "section
23-52-104(b) of the Arkansas Check Cashers Act is an invalid
attempt to evade usury provisions of the Arkansas
Constitution." Luebbers, 344 Ark. at 232. Subsequently, the
General Assembly repealed that portion of the Act which
purported to allow a check casher to treat the fees charged
in a payday lending transaction as something other than
interest.
More recently the Arkansas Supreme Court issued two
opinions regarding payday lending,
Arkansas Board of Collection Agencies and Old Republic
Surety Company v Mcghee, et al., No 07-129 (AR S. Ct.
Jan 17, 2008), and
Staton v Arkansas Board of Collection Agencies and American
Manufacturers Mutual Insurance Company, No. 07-53 (AR S
Ct. Feb. 21, 2008). In each case, the Court found that the
practice of payday lending is unconscionable and deceptive,
in addition to being prohibited by the Arkansas
Constitution.
Taken as a whole, these Arkansas Supreme Court rulings
make it clear that payday lending transactions, where the
effective interest rate is greater than that allowed by the
Arkansas Constitution, are prohibited. In the case of a
typical payday loan, where the effective interest rate
is far in excess of the legal limit, the loan is void as to
both principal and interest. As a deceptive and
unconscionable trade practice, the business of payday
lending is prohibited by the Arkansas Deceptive Trade
Practices Act (DPTA), and subject to the broad remedies
provided by the DTPA, including the imposition of
substantial civil penalties.
It is the position of this office that you must cease and
desist your payday lending practices. in addition, I hereby
demand that you void any and all current and past-due
obligations of your borrowers, and refrain from any
collection activities related to these payday loans. Be
forewarned that your failure to comply with this demand will
likely lead to litigation to enforce the laws of Arkansas.
I will expect a written response no later than Friday,
April 4, 2008, informing me of whether you intend to comply
with this demand. If, for some reason, you believe that your
practices are not subject to the requirements and
prohibitions of Arkansas law set out above, please contact
my office immediately. Thank you for your cooperation in
this matter.
Sincerely,
Dustin McDaniel
Attorney General
In addition
to demanding payday lenders cease their lending practices
immediately, McDaniel also demands they "void any and all
current and past-due obligations of their borrowers.
