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«OHIO STATE LAW JOURNAL VOLUME 66, NUMBER 4, 2005 Predatory Lending and the Military: The Law and Geography of “Payday” Loans in Military Towns ...»

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State-chartered banks have been a different story. Banks chartered by state governments are primarily regulated by that state’s bank examiner or department of financial institutions. However, state-chartered banks also receive oversight from the Federal Deposit Insurance Corporation (FDIC), which is an independent federal agency created in 1933 in response to bank failures during the Great Depression.319 State banks are under FDIC oversight because the banks purchase federal insurance from the FDIC to protect the bank accounts of their customers from theft and other losses. Unlike the OCC, the FDIC has turned a blind eye to charter-renting, taking the position that state bank charterrenting to payday loan companies is just as legal as the credit card loans made in the Marquette case.320 Consumer advocates have responded by furiously accusing the FDIC of undemocratically undermining every usury law in the nation.321 But the FDIC, which has an institutional history and culture focused almost exclusively on preventing bank failures, has essentially ignored the consumer protection concerns of payday lending critics.322 Thus, payday loan companies and state banks continue to claim a license to ignore state interest rate laws. Under this highly controversial interpretation of the law, so long as officials at the FDIC and one state government in the entire country refuse to prevent 450% loans, one state bank located in that one state may empower payday loan companies to export the state’s law (or lack thereof) to every borrower in the country. Sheltered under this protective regulatory umbrella, twelve state banks of the more than 5200 institutions currently supervised by the FDIC continue to act as facilitators for many of the nation’s payday loan companies.323 For their part, courts have not been able to agree on a definitive legal

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resolution as to whether banks and payday loan companies may use the Marquette doctrine to simply disregard state interest rate laws. Nevertheless, two trends have emerged. The first was cemented into place by Beneficial National Bank v. Anderson, where the Supreme Court held that state usury law does not bind national banks and “there is, in short, no such thing as a state-law claim of usury against a national bank.”324 However, Beneficial did not resolve the issue of the extent to which a bank may alienate its ability to ignore state usury law to other non-bank companies, such as payday lenders. On this issue, lower courts over the past few years have emphatically stated that while a bank may have the right to export interest rate laws, non-bank payday loan companies in a contractual relationship with a bank do not. At least nine courts have held that there is no federal preemption of usury claims where the victim alleges that a payday loan company is, in fact, making payday loans while using the name of a bank as a pretext to avoid state usury law.325 A federal district court in New York has gone so far as to hold that no federal legal issue exists where a state attorney general accuses a state bank of criminally aiding a payday loan company in committing criminal usury through a charter-renting arrangement.326 Thus, while banks may presently be free to avoid state usury law, it must, as a matter of economic fact, be the bank that makes and retains the risk on loans.327 As we shall see in the next subsection, this subtle, fact specific, 324 Beneficial Nat’l Bank v. Anderson, 539 U.S. 1, 11 (2003) (complete preemption doctrine required reversal of U.S. Court of Appeals order remanding state law usury claims to state court when brought against a national bank.) 325 Long v. ACE Cash Express, Inc., No. 3:00-CV-1306-J-25TJC, 2001 U.S. Dist.

LEXIS 24617, at *3–4 (M.D. Fla. June 18, 2001); Brown v. ACE Cash Express, Inc., Civ.

No. S-01-2674, 2001 U.S. Dist. LEXIS 25847, at *5–6 (D. Md. Nov. 14, 2001); Colorado v.

ACE Cash Express, Inc., 188 F. Supp. 2d 1282, 1284–85 (D. Colo. 2002); Goleta Nat’l Bank v. Lingerfelt, 211 F. Supp. 2d 711, 717 (E.D.N.C. 2002); Goleta Nat’l Bank v. O’Donnell, 239 F. Supp. 2d 745, 755–56 (S.D. Ohio 2002); Flowers v. EZPawn Oklahoma, Inc., 307 F.

Supp. 2d 1191, 1204–06 (N.D. Okla. 2003); People v. County Bank of Rehoboth Beach, 1:03-CV-1320 (N.D.N.Y. May 25, 2004), www.abanet.org/buslaw/committees/CL230044pub/links.shtml (subscription required);

Carson v. H&R Block, Inc., 250 F. Supp. 2d 669, 675 (S.D. Miss. 2003); BankWest, Inc. v.

Oxendine, 598 S.E.2d 343, 347–48 (Ga. Ct. App. 2004).

326 The court stated:

[The bank’s argument] would be relevant if the State in this case were asserting state law usury claims against County Bank. However, as stated above, the State’s claims against County Bank include only allegations of criminal facilitation, fraudulent business conduct, and deceptive business practices, none of which is preempted by federal law.

People v. County Bank of Rehoboth Beach, 1:03-CV-1320, at 8 (N.D.N.Y. May 25, 2004), www.abanet.org/buslaw/committees/CL230044pub/links.shtml (subscription required).

327 One federal judge explained:

2005] PREDATORY LENDING AND THE MILITARY 709 and still-evolving rule appears to have a significant impact on payday lending to military personnel in some states.

B. State Law and Empirical Results In this section, we present our empirical findings regarding geographic location strategies of payday lenders. However, because our intention is not to provide mere geographic information, but also to explore the legal implications of that information, we present our empirical results alongside a description of the laws controlling payday lending in each state. Thus, for each state, we present a short summary of state payday lending law, a characterization of the prevalence and density of payday lending statewide, and brief descriptions of the patterns of payday lending found at the county and ZIP code resolutions near military installations. For those particularly significant military installations chosen for in-depth, street-level analysis, we include a short discussion of those findings where appropriate. We also provide maps to assist readers in visualizing payday lender location strategies.328





1. Alabama

Like many states, Alabama has a general usury law, which caps interest rates at eight percent and is riddled with exceptions for various types of lenders.329 In 2003, payday lenders successfully lobbied the Alabama legislature to enact the Deferred Presentment Services Act (DPSA). The statute authorizes the Alabama Bureau of Loans to grant licenses to payday lenders.330 Licensed In this case..., [a]lthough Ace contends that Goleta is the real maker of the loans at issue, the state contends just the opposite: that Ace is using Goleta’s name as mere subterfuge for its own unlawful lending practices. Thus, a sharp factual issue is presented as to whether Goleta, a national bank, is the real lender at issue. If Ace is the de facto lender, then its payday loans may violate the North Carolina Check Casher Act Goleta Nat’l Bank, 211 F. Supp. 2d at 717.

328 A complete presentation of our results and data is beyond the space limitations of this Article. However, complete records of our results are on file with the authors. Unless noted otherwise, all data is drawn from sources as explained in Section III.B, which describes our methodology. All annual percentage rate calculations were computed using the National Consumer Law Center’s rate calculation software and assume a fourteen-day loan term. See KATHLEEN E. KEEST ET AL., THE COST OF CREDIT: REGULATION AND LEGAL CHALLENGES (2d ed. 2000 & Supp. 2004) (software disk accompanying treatise).

329 ALA. CODE §§ 8-8-1, 5-18-1 to 5-19-31 (2005); KEEST & RENAULT, supra note 328 at § 2.5.

330 ALA. CODE § 5-18A-3 (2005).

710 OHIO STATE LAW JOURNAL [Vol. 66:653 payday lenders are allowed to charge “17.5% of the amount advanced.”331 As a result, the Act authorizes an effective APR of around 455%, one of the highest state payday loan interest rate caps in the country.332 Loans made under the DPSA are limited to an amount of $500,333 and their duration must be between ten and 31 days,334 although lenders may renew or extend the loan one time.335 Also, a lender is not supposed to make a new payday loan to pay off an old loan.336 However, the provisions discouraging this practice are relatively weak.

The statute requires lenders to use a third-party private sector database to deny payday loan applications sought by borrowers with outstanding payday loans.337 However, lenders must only deny applications from borrowers who have over $500 in outstanding payday loan debt,338 and referencing the third-party database is only required if such a database is “available.”339 Payday loan lenders are also supposed to display a schedule of all fees, charges, and penalties,340 and disclose to borrowers the total amounts of all fees and other costs that will or potentially could be imposed as a result of entering a deferred presentment transaction.341 Under these laws, Alabama has seen an explosion in payday lending, becoming one of the states most densely populated with payday lenders in the nation. Today, payday loan companies are now nearly as common in Alabama as traditional banks. In 2004, Alabama was home to 1077 payday lenders and 1458 banks.342 This is the highest payday lender-to-bank ratio of any state in 331 Id. § 5-18A-12(a).

332 Assuming a loan term of fourteen days, a 17.5% fee equates to an effective annual percentage rate of about 455%. Although payday lenders could also operate under the authority of the Alabama Small Loan Act, Id. §§ 5-18-1 to 5-18-24, including its 36% annual interest rate, Id. § 5-18-15(a), lenders clearly prefer the generous interest rates authorized by the DPSA. Lenders also may charge a fee of $30 for any bounced check. Id. §§ 5-18A-12(d), 8-8-15.

333 Id. § 5-18A-12(a).

334 ALA. CODE § 5-18A-13(c) (2005).

335 Id. § 5-18A-12(b).

336 Id. § 5-18A-13(n).

337 Id. § 5-18A-13(o).

338 Id.

339 Id. This provision of the Alabama statute originally required the state to establish a central database of payday loans, but local consumer advocates argue that a last-minute change to the provision severely weakened the legislation. ARISE CITIZENS’ POLICY PROJECT,

HARD CASH: PREDATORY LENDING ALABAMA,

IN http://www.alarise.org/Predatory%20lending%20fact%20sheet%2010-04.pdf (last visited Oct. 17, 2005).

340 ALA. CODE § 5-18A-13(m) (2005).

341 ALA. CODE § 5-18A-13(f) (Supp. 2004).

342 State of Alabama Banking Department, ADPSA License Search, 2005] PREDATORY LENDING AND THE MILITARY 711 our survey. Alabama also has the highest number of payday lenders per person, with over 24 for every 100,000 residents. To put this rate into some perspective, consider Colorado, which has about 100,000 fewer people than Alabama, has 711 fewer payday lenders, but only 68 fewer banks.

As extraordinary as the density of payday lenders is in Alabama as a whole, several military areas nevertheless manage to stand out. Coffee County, which shares much of its eastern border with the Army’s Fort Rucker, has the second highest density of payday lenders, based on our composite index measurement.

As illustrated in Table 1, the 43,615 people living in Coffee County have only fourteen banks, but have 20 payday lenders. Even for Alabama, the density of payday lenders located near Fort Rucker is extremely high. By way of perspective, Coffee County has two more payday lenders than Ohio’s bluecollar Lorain County, which has a population of 285,000 people, and the 43,615 people of Coffee County have two times the number of payday lenders as Fairfax County, Virginia, where almost one million people live. Other Alabama counties with large military installations, including Houston, Montgomery, Calhoun, Autauga, and Morgan counties, also show high payday lending location densities.

http://www.bank.state.al.us/ADPSA_licenses.asp (last visited Oct. 17, 2005).



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