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Arkansas Courts Declare Payday Lenders Usurious.

THOUSANDS OF ARKANsans are unaware that they may be living in a day of jubilee and that a portion of their debts has been canceled.

Arkansas judges throughout the state are declaring check-cashing agreements invalid. The rulings are leaving payday lenders no legal recourse for collecting on contracts that judges effectively have labeled void.

The decisions affect the nearly 400 "payday advance" businesses in Arkansas and a conservatively estimated 43,600 customers who owe them money.

How much money? At least $12 million, according to Bob Srygley, a board member of the Arkansas Check Cashers Association. He and his peers are fighting to keep payday lending -- which the industry prefers to call "deferred presentment -- from being formally outlawed in Arkansas.

"We're going to try to keep that from happening, of course, and continue to provide the service we're providing to the public," said Srygley, a Monticello businessman who owns a dozen check-cashing outlets around the state.

That effort would appear to be an uphill battle, given the growing number of court rulings around Arkansas. Some legal observers have concluded that the only effective way to gain true legitimacy would be to alter the state's usury law.

And that would require a task few would relish: amending the Arkansas Constitution.

At the core of the dispute is whether the fee charged by payday lenders is actually interest and whether what they call accounts receivable are actually illegal loans.

The number of successful lawsuits against payday lenders is growing as customers invoke the 125-year-old usury statute and judges concur that the fees charged are interest typically calculated in triple digits.

Any contract found to be usurious unenforceable. And more customers of payday lenders are walking away from onerous debts, with an added judicial blessing if the move is contested in court.

Safe Haven?

Payday lenders thought they had found a safe haven for operations after successfully lobbying the Arkansas Legislature for the Check Cashers Act of 1999. (See story, Page 21.)

The law, crafted by payday lenders themselves, cloaks the fees in legislative legitimacy. However, judges in various courts around the state are implicitly or explicitly declaring that law unconstitutional.

Among the more outspoken is Springdale Municipal Judge Stanley W. Ludwig. On Oct. 4, 2000, he dismissed lawsuits filed, by Payday Advance and Payday Money Store, which were trying to collect money from a total of five customers.

Ludwig decided that a trial was unnecessary because he could make a ruling based on the evidence already filed. At the heart of his decision were these observations:

"The court finds that the so-called fees are interest, and based upon plaintiff's own pleadings and attached exhibits, these charges amount to usurious interest.

"No matter what label is attached to the cost of hiring money, interest is what is being exacted. This is the case even though the Legislature is the entity attaching such labels by enactment of Act 1216 of 1999.

"As Juliet says in 'Romeo and Juliet': 'What's in a name? That we call a rose by any other word would smell as sweet.'

"Arkansas Constitution Section 13(b) provides, in part, 'All contracts for consumer loans having a greater rate of interest than 17 percent per annum shall be void as to principal and interest.'

"The Constitution refers to 'interest'; Act 1216 refers to 'fees'; just the same, both are charges for the use of money.

"This court may, and hereby does find that Act 1216 of 1999 is itself void as being contrary to the Constitution of the State of Arkansas, which prohibits usurious interest."

Arbitrary Arbitration

Other payday lenders are discovering that a move to protect themselves from lawsuits isn't working, either.

Some payday lenders include clauses in their check-advance agreements that require unhappy customers to seek arbitration instead of courtroom remedies. While prohibiting customers from suing them, these agreements commonly reserve the right for payday lenders to pursue any and all legal action to collect money.

The Arkansas Supreme Court ruled such arbitration clauses invalid because both parties are not mutually bound to resolve any disputes through arbitration.

Arbitration agreements "should not be used as a shield against litigation by one party while simultaneously reserving solely to itself the sword of a court action," said the Supreme Court in a Sept. 22 ruling after Showmethemoney Check Cashers Inc. of Arkadelphia cited an arbitration clause in appealing a Clark County Circuit Court decision.

On Aug. 26, 1999, the lower court ruled that the arbitration clause was unconscionable and unenforceable and ordered a class-action suit against the payday lender to proceed.

Circuit judges in Arkadelphia and Hot Springs have declared similar arbitration clauses invalid. Those cases involve Advance America/Cash Advance Centers of Arkansas Inc. of Arkadelphia and Check 'n Go of Arkansas Inc. of Hot Springs.

In his order Nov. 14, 2000, Garland County Circuit Judge John Homer Wright said the check-advance, contract itself appeared to be usurious on its face and, therefore, void.

"Since the arbitration provisions are part of a void contract, there is no enforceable arbitration agreement," he said.

Rulings Stack Up

As the unfavorable rulings begin to pile up against payday lenders, the only favorable case the Check Cashers Association can cite is from Benton County Circuit Court.

Judge Tom Keith dismissed a lawsuit filed against the Money Store Inc. of Lowell et al by Crystal Luebbers. Her complaint alleged that the cash advance agreement was protected by an unconstitutional law, the Check Cashers Act. Keith, however, disagreed and ruled it was constitutional.

The constitutional question is among other payday-related items scheduled to go before the Arkansas Supreme Court.

Todd Turner of the Arkadelphia law firm of Morgan & Turner has about 20 active cases against payday lenders in Clark, Garland, Pulaski, Faulkner, Pope, Yell and Craighead counties. He has been pursuing class-action lawsuits against several companies since 1998.

Two single location companies Turner sued have retreated from Arkansas rather than fight it out in court.

E Z Cash of Hot Springs closed its doors and left the state after mounting a brief defense. The owners of E Z Cash, Freda and James Batchelder, contended their business wasn't subject to the Arkansas usury law.

This claimed exemption was based on the fact that Horizon Financial Services LLC, which does business under the E Z Cash name, is organized under Missouri law.

The Missouri Small Loan Act seems to grant an exception to that state's usury law for certain small cash loans to consumers. But E Z Cash backed down rather than press its Show-Me State defense.

Check Point in Little Rock closed shop after six months of operations when it was sued by Turner and his various clients. Bigger operations are digging in for a fight.

But Turner believes the days of payday lending are numbered. He considers the Check Cashers Act of 1999 at best only a delay of the inevitable.

"We had all these lawsuits going, and we just ignored it when the law came up in the Legislature because it's unconstitutional on its face," Turner said. "It's for the courts to decide whether these are loans or not, not the Legislature."

AG Backs Off

Perhaps the most important aspect of having the law enacted was to cause the Arkansas attorney general to back off.

The attorney general's office, charged with protecting consumers, was actively involved in payday-lending litigation around the state until the Legislature codified the check-advance business as legal.

Among the details that drew the interest of the AG's office was the nature of the payday-lending business, which critics equate with loan-sharking.

Before the passage of the Check Cashers Act, payday lenders typically advanced cash to a customer who wrote a check for the amount, plus a substantial fee. A charge of $15 for every $100 advanced was common.

The check was held until the customer's next payday, when the advance and fee were repaid in full or the debt was rolled over to the next payday after the fee was paid.

Each payday, the customer must repay the advance in full or renew the agreement by paying the fee. If the debt wasn't quickly squared away, the customer could end up paying fees that easily exceed the original advance without ever having reduced the debt.

One customer now suing Showmethemoney paid $720 in fees in eight months on an original $300 advance without ever having reduced the principal.

The rollover effect drew special ire from those who believe payday lenders prey on ignorant consumers and seek to financially enslave them. The Check Cashers Act did away with the rollover provision, limiting the agreement to 30 days with no renewal option and a flat holding fee of $10.

Opponents point out that a "check-cashing fee" of $10 per $100 is charged on top of the holding fee, both of which they claim amount to usurious interest. They also suggest that the 30-day, no-rollover provision merely forces customers to go to a different payday lender to borrow money to pay off the original debt-- a cycle just as objectionable as the rollovers.
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Comment:Arkansas Courts Declare Payday Lenders Usurious.
Publication:Arkansas Business
Article Type:Brief Article
Geographic Code:1U7AR
Date:Dec 25, 2000
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