SW Legal studies in Business

Payday Loans Violate State Usury Limits
Description

Arkansas high court struck down a state statute that allowed payday loans by calling a loan a service rather than a loan and the interest charged a service fee rather than interest. These were loans in reality, and the interest rate charged was higher than permitted by the usury provision in the state constitution.

Topic

Consumer Protection

Key Words

Payday Loans; Usury; Constitutionality

C A S E   S U M M A R Y
Facts

The Arkansas constitution limits interest rates that may be charged on loans. This restriction on interest rates, a usury law, was claimed to apply to payday loans. The legislature enacted the Check-Cashers Act. It applied primarily to payday loans. In those transactions, the consumer writes a check, the amount of which includes the cash to be advanced to the customer, plus a service fee. The check is dated in the future (payday) and the lender does not cash the check until that date. The Check-Cashers Act stated that such cash advances were not loans, so were not subject to the usury limit. The service fee was claimed not to be the same as interest on a loan. The constitutionality of the act was challenged. The lower court upheld the Act; plaintiffs appealed.

Decision

Reversed and remanded. The Check-Cashers Act is unconstitutional. The reality of the cash-advance transaction, regardless of what it is called, is that it is a loan with interest charged. The borrower is loaned money that is repaid later. The service fee is the same as interest charged by a lender. Hence, the usury limit applies and the legislature cannot assert that payday loans are not subject to the limit. The constitution limits the annual interest rate on consumer loans to 17%; in some cases the service fees on the payday loans amounted to an annual interest rate of 500%, a clear violation of the usury limit.

Citation

McGhee v. Arkansas State Board of Collection Agencies, ---S.W.3d--- (2008 WL 4823540, Sup. Ct., Ark., 2008)

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