Payday Lenders Getting Stiff-Armed

Just what we need: another overreaching state attorney general trying to make a name for himself. Arkansas' attorney general wants to shut down payday lenders in his state, and he's sent letters to some 60 companies doing business there, telling them to pack up, ship out, and -- oh yeah! -- forgive all the debts of the people who borrowed money from them.

Unfortunately, payday lenders are used to feeling the strong arm of the law around their necks. North Carolina, Georgia, and about a dozen other states have outlawed payday lending. For individuals needing small bridge loans -- well, tough luck! You can't have one.

The move in Arkansas is a direct assault on the nation's largest payday lender,Advance America (NYSE: AEA  ) , which has 30 stores in the state. EZCORP (Nasdaq: EZPW  ) has only one. Others, like Cash America (NYSE: CSH  ) and QC Holdings (Nasdaq: QCOO  ) , don't have any operations in the state, though First Cash Financial (Nasdaq: FCFS  ) operates nine buy here/pay here auto dealerships, which tend to cater to the same clientele.

From New York's Eliot Spitzer to Mississippi's Jim Hood and Mike Moore, we've seen attorneys general like Arkansas' Dustin McDaniel get creative with laws on the books to further their own agenda. Spitzer used New York's rarely used and little-known 1920s-era Martin Act to prosecute alleged white-collar crimes. Hood has been accused of colluding with trial lawyer Dickie Scruggs -- who just pled guilty to bribery charges in an unrelated case --  of trying to force State Farm Insurance to settle lawsuits over Hurricane Katrina by threatening to launch a criminal investigation. Before that, Moore sicced Scruggs on asbestos companies and the tobacco industry, reaping billions for the state as a result.

McDaniel's maneuver, however, seems unusual, because it's driving out of business -- and branding as illegal -- an industry that was specifically allowed to operate in the state of Arkansas by the state's Check Cashers Act. However, the state supreme court ruled that the act didn't give payday lenders "blanket protection."

Arkansas limits the amount of interest a lender may charge for a loan, as do many states. Exceed those limits, and you can be prosecuted for usury. The rent-to-own industry has run afoul of those laws from time to time. In 2006, New Jersey successfully prosecuted Rent-A-Center (Nasdaq: RCII  ) for violating its usury laws, because fees it charged for renting furniture and appliances exceeded the state's 30% cap. The industry contended that the property is leased, so the contract didn't constitute a retail installment contract, but the court dismissed those arguments.

That seems to be the rub here in Arkansas. While companies can't charge more than 17% in the state, the state's supreme court previously ruled that the fees charged by payday lenders weren't necessarily a violation. For the state's attorney general to now forbid companies from collecting on borrowers' debts, and demand that the industry leave Arkansas, seems a bit of a reach.


Read/Post Comments (1) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 22, 2008, at 5:18 PM, DarwinAward wrote:

    Government Big Daddy will save you - NOT

    If the government prevents these people from giving their money away like this, they will find another way,,

    Pawn Shops charge more, that would be a good choice for them.

    Bank Overdraft charges are LOTS more, that would finish them off even faster.

    GO Darwin GO

    JLFS

Add your comment.

DocumentId: 605818, ~/Articles/ArticleHandler.aspx, 7/29/2014 2:51:44 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement