Copyright (c) 2003 University of North Carolina
School of Law Banking Institute
North Carolina Banking Institute
April, 2003
7 N.C. Banking Inst. 317
LENGTH: 11642 words
NOTES & COMMENTS: IV. Payday Lending: The Beginning
of the End: The Demise of Bank Partnerships with
Payday Lenders
NAME: Tasha L. Winebarger
SUMMARY:
... Payday lenders provided access to cash to those
who had minimal access to banks. ... Finally, a
group of states permits payday lending, but governs
such lending through specific payday loan statutes.
... The Act affects payday lending when payday
lenders affiliate with federal banks located in
states with no or minimal interest rate
restrictions. ... It would achieve this by
prohibiting a national bank from using a payday
lender as an agent unless "such loan is in full
compliance with the law of the State in which such
loan is made. ... One difference between the credit
card arrangement and that of a payday lender
partnering with a national bank is that the
credit-card program was operated by a company wholly
owned by the national bank. ... Plaintiffs argued
that the National Bank Act asserts that the
allowable interest rate on payday loans is
determined by Goleta's home state, California. ...
The State argued that Ace Cash Express (the payday
lender), not Goleta National Bank (the national
bank), made the loans at issue in the state action.
... Hudson sued defendants Ace Cash Express, several
of its officers, and Goleta National Bank for making
a payday loan in violation of Indiana usury law and
other federal laws. ...
TEXT:
[*317]
When banks eliminated profit-draining services in
the 1980s, millions of low-income households were
left with little access to financial services. 1
Consumers seeking short-term loans for small amounts
found that banks did not offer such loans. 2 Because
many of these consumers could not qualify for a
credit card, they were forced to search elsewhere to
fulfill their credit needs. 3 Payday lenders
provided access to cash to those who had minimal
access to banks. 4 Since the early 1990s, the amount
of payday loans issued has risen from virtually zero
to about fifteen billion dollars a year. 5
When one borrows money from a payday lender, the
borrower typically writes a personal check payable
to the lender. 6 The amount payable represents the
amount the borrower wishes to borrow, in addition to
a fee. 7 Usually, the fee equals a percentage of the
value borrowed or a fee per each one hundred dollars
loaned. 8 In many states, the borrower maintains
three options after writing the lender the check. 9
At any time, the borrower may pay the lender the
amount of the check's face value in order to redeem
his or her check, minus the fee. 10 The [*318]
borrower's second option is to allow the lender to
cash the check after the loan period. 11 Finally, if
the borrower cannot afford to pay the loan, many
states allow the lender to extend the loan for
another loan period, resulting in the borrower again
paying the finance charge. 12 Because most of the
payday lenders charge flat fees, the loans carry
exorbitant annual percentage rates, 13 typically
ranging from 250 percent to more than 1000 percent.
14
Many states have enacted strict usury laws
prohibiting the high interest rates charged by
payday lenders, 15 while other states have enacted
laws prohibiting payday lending altogether. 16 Even
with these restrictions, the practice frequently
makes its way into such states through lenders
partnering with a national bank located in a
different state that lacks strict usury laws. 17
Recently, federal courts have been asked to decide
whether payday lenders may take advantage of what
many have referred to as a "loophole" in the law. 18
Part I of this Note will examine state regulation of
payday lending. 19 Part II will explain the role of
federal law in payday lending. 20 Part III will
discuss recent strikes against payday [*319]
lenders' partnering with national banks. 21 Part IV
will explore the future of such partnerships. 22
I. State Regulation of Payday Loans
In an amendment to the Truth in Lending Act's
Official Staff Commentary, the Federal Reserve Board
ruled that payday lenders must publish annual
interest rates. 23 Also, the Federal Trade
Commission has brought charges against payday
lenders for false representation to consumers. 24
Although these federal regulations exist, payday
lenders are primarily regulated by the states. 25
Many states have enacted usury laws that establish
interest rate ceilings. 26 States fall into three
categories with regard to the regulation of payday
lending. 27 One group of states requires payday
lenders to comply with usury restrictions. 28
Another group allows payday lenders to charge any
interest rate they choose. 29 Finally, a group of
states permits payday lending, but governs such
lending through specific payday loan statutes. 30
[*320]
II. Federal Law Permitting Bank Exportation of
Interest Rates
One piece of federal legislation in particular
allows payday lenders to bypass the constraints of
state usury laws. 31 Section 85, known as the
National Bank Act, has emerged as an enabling
statute for payday lenders. 32 The Act allows
national banks to charge customers in other states
interest rates limited only by the usury statutes of
the state in which the national bank is physically
located. 33 Enacted in 1864, the Act sought to
advantage weak national banks and state banks. 34
The Act did not seek to provide a loophole for
payday lenders, nor could those enacting the
legislation even envision such a purpose. 35 Payday
lending is a modern problem finding a solution in
long-standing legislation. 36
Under Section 85, national banks may export the
usury law of their home state nationwide. 37 The
laws of a particular national bank's home state then
preempt any state laws restricting interest in the
borrower's state. 38 The Act affects payday lending
when payday lenders affiliate with federal banks
located in states with no or minimal interest rate
restrictions. 39 Once affiliated with [*321] these
banks, payday lenders may charge their customers any
interest rate allowed in the state of the bank, even
if the customers reside in states having restrictive
usury statutes. 40 Thus, payday lenders circumvent
state usury laws by forming partnerships with banks
holding national charters. 41
At the end of 1999, seven national banks had
partnered with payday lenders. 42 A report issued in
2001 by the Consumer Federation of America and the
U.S. Public Interest Research Group listed nine
banks that worked with payday lenders. 43 Some of
these national banks contribute nothing more to the
partnership than allowing the payday lender access
to their state's usury laws. 44 Currently,
approximately twelve banks partner with payday
lenders. 45 These partnerships of national banks and
payday lenders account for an estimated ten percent
of all payday loans issued. 46
In addition to Section 85, a federal statute enacted
in 1980 provides the same possibility for interest
rate exportation to state banks. 47 Like Section 85,
Section 1831d seeks to prevent discrimination
against state banks. 48 The legislation provides
that the interest rates of a foreign bank, with a
charter in a particular state, preempt the interest
rates allowable by the state in which the foreign
bank is chartered. 49 Thus, the legislation provides
a vehicle for payday lenders to escape state usury
laws by partnering with a foreign bank. 50
[*322]
III. Recent Strikes at Payday Lenders' Partnering
with National Banks
A. State Action
States are beginning to strike the payday lending
industry's practice of circumventing state usury
laws by partnering with national banks. 51 A new law
in Maryland prohibits any company in the state from
acting as a broker for payday loans from a national
bank. 52 Since 1999, officials at the New York State
Banking Department have sent letters to lenders,
noting that charging more than twenty-five percent
interest is criminal under New York law. 53 Although
legislation regulating payday lenders' partnerships
with national banks expired in North Carolina in
2001, 54 the North Carolina legislature is
considering similar regulation. 55
In March 2002, Indiana enacted a law to prohibit
banks from partnering with payday lenders. 56 The
chief counsel for the state's Department of
Financial Institutions, J. Phillip Goddard, accused
payday lenders and banks partnering with them of
"greed." 57 This action by Indiana forced Republic
First Bancorp, Inc. of Philadelphia, a company with
$ 680 million in assets, to exit the state. 58
Republic First Bancorp, Inc. accounted for
sixty-five percent of the short-term loan business
in the state. 59
[*323]
B. Federal Action
Recently, the United States government has taken
action. 60 On January 3, 2002, the Office of the
Comptroller of the Currency (OCC) ordered Eagle
National Bank of Upper Darby, Pennsylvania to stop
providing payday loans to one of the nation's
largest payday lenders, Dollar Financial Group. 61
This order provided the first concrete evidence of
the OCC's disapproval of alliances between national
banks and payday lenders. 62 The OCC emphasized
Eagle National Bank's lack of supervision of the
loan program. 63
In the order, the Comptroller of the Currency, John
D. Hawke, Jr. stated: "Eagle simply did not have the
capacity to manage the relationship." 64 Hawke
continued: "The bank essentially rented out its
national bank charter to a payday lender to
facilitate [Dollar's] evasion of the requirements of
state law that would otherwise be applicable to it."
65 Hawke emphasized that the OCC based its action
against Eagle on an examination of how Eagle
National Bank ran the loan program, rather than on
the existence of the alliance itself. 66
Noting the shortcomings of the arrangement, Hawke
pointed out that Dollar Financial Group had opened
stores in some states and had begun originating
payday loans without Eagle National Bank's knowledge
or approval. 67 Ultimately, Hawke termed the
arrangement between Eagle National Bank and Dollar
Financial Group as "charter abuse." 68 Declaring the
purpose of the OCC's action, Hawke stated: "We don't
want to see the national bank charter used by
nonbank entities as a way of evading [*324] state
law." 69 Regarding the OCC's decision, the consumer
protection director at the Consumer Federation of
America commented: "Eagle National Bank and Dollar
Financial Group pioneered the rent-a-bank payday
loan arrangement to get around state laws." 70 The
consumer protection director stated that "the OCC's
action is an important first step toward closing
that loophole." 71
In October 2002, the OCC took another step in that
direction. 72 The OCC ordered Goleta National Bank
to stop providing payday loans through the offices
of Ace Cash Express, Inc., the nation's largest
check-cashing chain. 73 A spokesperson for the OCC
said that Ace's failure to safeguard customer files
on loans issued by Goleta prompted the order. 74 The
OCC also found that Ace committed "unsafe and
unsound practices including a pattern of excessive
exceptions to Goleta's policies and procedures." 75
Ace agreed to pay a fine of $ 250,000 and Goleta
agreed to a fine of $ 75,000. 76 Comptroller of the
Currency John D. Hawke, Jr. said: "Ace's inability
to safeguard the files of customers whose loans were
booked at Goleta shows just how risky those
relationships can be between banks and payday
lenders." 77
The OCC is also seeking to issue an enforcement
action against People's National Bank of Paris,
Texas, a company with [*325] $ 103 million dollars
in assets. 78 In support of its action, the OCC
claims People's National Bank is operating an
illegal payday lending business. 79 Contesting the
action, People's National Bank has filed suit in
federal court. 80
Notwithstanding the actions by the OCC, federal
legislation is also pending. 81 The Payday Borrower
Protection Act of 2001, if passed, would prohibit
payday loans unless authorized and regulated by
state law. 82 Moreover, the Act would disallow the
exportation of interest rates for payday loans. 83
It would achieve this by prohibiting a national bank
from using a payday lender as an agent unless "such
loan is in full compliance with the law of the State
in which such loan is made." 84 Therefore, the
interest rate would have to comply with the usury
laws of the state in which the loan is made, not the
home state of the national bank. 85
C. The Supreme Court's Examination of a Similar
Issue
Although the Supreme Court has not addressed the
precise issue of payday lending, the Court has
examined a similar issue. 86 In Marquette National
Bank of Minneapolis v. First of Omaha Service
Corporation, Marquette National Bank of Minneapolis,
a Minnesota-chartered national banking association,
brought suit against First National Bank of Omaha, a
national banking association chartered in Nebraska.
87 Marquette brought suit to enjoin the operation of
First National Bank of Omaha's credit card [*326]
program in Minnesota until the bank complied with
Minnesota's usury laws. 88
The issue before the Court was whether the National
Bank Act authorized a national bank based in one
state to charge its out-of-state credit-card
customers an interest rate on unpaid balances
allowed by its home state, when that rate was
greater than that permitted by the nonresident
customers' state. 89 The Court held that the
National Bank Act allowed the bank to charge the
higher rate. 90
Although the credit-card program at issue in
Marquette does not equate with payday lending per
se, the resemblance between the two is compelling.
Both programs essentially involve an extension of
credit, and the Court in Marquette noted that the
credit-card program enabled cardholders to obtain
cash advances from participating banks, 91 just as a
payday lender offers cash in advance. 92 Another
similarity between the credit card program and
payday lenders who partner with national banks is
that the credit-card program was operated by another
corporation. 93
One difference between the credit card arrangement
and that of a payday lender partnering with a
national bank is that the credit-card program was
operated by a company wholly owned by the national
bank. 94 Marquette fails to shed light on the
National Bank Act's effect on payday lenders because
the agent of the national bank did not claim to
extend credit in Marquette. 95
[*327]
D. Two Federal Courts Take Different Approaches
1. Ace Cash Express, Inc. v. Lingerfelt
Recently, federal courts have been asked to examine
the partnership between payday lenders and national
banks. 96 The first approach comes out of Goleta
Nat'l Bank v. Lingerfelt. 97 Plaintiffs Goleta
National Bank and Ace Cash Express, Inc. brought an
action to enjoin North Carolina officials from
enforcing state lending and consumer protection laws
against Ace Cash Express, Inc. with regard to its
practice of payday lending. 98 The United States
District Court for the Eastern District of North
Carolina granted the state's motion to dismiss the
suit. 99
Goleta National Bank and Ace Cash Express, Inc.'s
action stemmed from a previous lawsuit. In January
2002, the Commissioner of Banks of North Carolina
and the Attorney General of North Carolina, acting
on behalf of the State, filed suit against Ace. 100
The State alleged that Ace Cash Express was engaged
in payday lending that violated North Carolina's
usury statutes. 101 Ace Cash Express removed the
case to federal court, asserting that federal
question jurisdiction existed because the [*328]
State's claims were preempted by the National Bank
Act. 102 The federal court ultimately granted the
State's motion to remand the case to Wake County
Superior Court, concluding that the National Bank
Act did not completely preempt a state action
against Ace Cash Express, a non-national bank. 103
The federal court reasoned that the Goleta National
Bank and Ace Cash Express are separate entities, and
stated: "The Complaint strictly is about a
non-bank's violation of state law. It alleges no
claims against a national bank under the NBA." 104
In Wake County Superior Court, a settlement was
reached between Ace Cash Express and state
officials. 105 Under the agreement, the attorney
general dropped the suit, and Ace Cash Express
promised not to make payday loans in North Carolina
for the next twelve months. 106 Ace Cash Express
must follow state law should it resume making payday
loans once the year is over. 107 To re-enter the
payday lending business, Ace Cash Express
additionally must obtain a state license. 108
Before the settlement in Wake County Superior Court,
Goleta National Bank and Ace Cash Express requested
the following relief in Goleta Nat'l Bank v.
Lingerfelt: (1) a declaration that the National Bank
Act preempts the state action claim against Ace Cash
Express, (2) a declaration that any North Carolina
law which prohibits Ace Cash Express from engaging
in payday lending violates the plaintiffs'
constitutional rights to liberty and property, and
(3) an injunction preventing the State from
enforcing the North Carolina laws at issue in the
state action against either Ace Cash Express or
Goleta National Bank. 109 Plaintiffs argued that the
National Bank Act asserts that the allowable
interest rate on payday loans is determined by
Goleta's [*329] home state, California. 110
Secondly, the plaintiffs claimed that because 12
U.S.C. 24 authorized Goleta to use an agent to make
loans, North Carolina laws prohibiting Ace Cash
Express from making payday loans violated the
plaintiffs' rights under federal law. 111 Third, the
plaintiffs asserted that, under 12 U.S.C. 484, the
United States Office of the Comptroller of the
Currency has exclusive authority to regulate
national banks, and therefore, the State's efforts
to enforce its laws against Ace Cash Express
violated the plaintiffs' rights under federal law.
112 Finally, the plaintiffs alleged that North
Carolina law, as applied against Ace Cash Express,
violated the Fourteenth Amendment in that it
deprived Ace Cash Express and Goleta National Bank
of economic liberty and property without due
process. 113
The State argued that Ace Cash Express (the payday
lender), not Goleta National Bank (the national
bank), made the loans at issue in the state action.
114 Goleta and Ace Cash Express asserted that Ace
Cash Express was merely Goleta's agent in promoting,
originating, and servicing these loans. 115
Therefore, the federal court acknowledged that the
identity of the true lender was a disputed fact in
both the federal and state action. 116
Ultimately, the court dismissed the federal suit,
finding no merit in Ace Cash Express's argument that
the National Bank Act's preemption rendered the
state action facially conclusive. 117 Regarding the
state action, the federal court stated:
While it is true that the NBA does preempt state
efforts to regulate the interest collected by
national banks, the NBA patently does not apply to
non-national banks. In this case, the state action
claims are asserted against Ace, a non-national
bank. Although Ace contends that Goleta is the real
[*330] 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. 118
This federal court's interpretation of the National
Bank Act proves consistent with its purpose. 119 At
the time of its enactment in 1864, the Act sought to
provide an advantage to weaker national banks. 120
The Act did not seek to provide a loophole for
payday lenders. 121 In fact, those enacting the
legislation could not even envision such a purpose
as payday lending is a modern practice. 122
2. Hudson v. Ace Cash Express, Inc.
Another federal court has taken a different stance
than that taken by the United States District Court
for the Eastern District of North Carolina. 123 The
second approach adopted by a federal court comes out
of Hudson v. Ace Cash Express, Inc. 124 Hudson sued
defendants Ace Cash Express, several of its
officers, and Goleta National Bank for making a
payday loan in violation of Indiana usury law and
other federal laws. 125 Defendants moved to dismiss
all asserted claims for failure to state a claim
upon which relief could be granted. 126 The United
States District Court for the [*331] Southern
District of Indiana granted defendants' motion to
dismiss. 127
In Hudson, the plaintiff contended that a genuine
issue existed as to whether Goleta National Bank or
Ace Cash Express was the actual lender. 128
Asserting that Goleta National Bank was not the
lender, the plaintiff argued that Goleta's role in
servicing her loan was so insignificant that the
court should regard Ace as the true lender, despite
the fact that Goleta issued the loan. 129 Also, the
plaintiff suggested that the district court should
regard Ace Cash Express "as the true lender because
defendants' lending arrangement was designed for the
sole purpose of circumventing Indiana usury law."
130
The district court accepted the plaintiff's factual
premises regarding Goleta National Bank's role and
the defendants' purposes in making the loans. 131
After recognizing its acceptance of the plaintiff's
premises, the district court stated: "These
arguments might appeal to those who believe
substance should always trump form in the law, and
they may provide a reasonable foundation for closer
federal regulation of national banks that engage in
such transactions. These arguments do not, however,
offer a basis for giving Hudson any relief." 132
The district court in Hudson cited the Supreme Court
case Marquette National Bank, which held that the
National Bank Act authorizes a national bank in one
state to charge its out-of-state credit card
customers any interest rate allowed by its home
state, even when the rate charged is greater than
the rate permitted by the customer's home state. 133
In examining Marquette, the district court in Hudson
noted that the Supreme Court recognized that the
National Bank Act "will significantly impair the
ability of States to enact effective usury laws."
134 The Supreme Court added that "the [*332]
protection of state usury laws is an issue of
legislative policy, and any plea to alter 85 to
[protect state usury laws] is better addressed to
the wisdom of Congress than to the judgment of the
Court." 135 Likening the case to Marquette National
Bank, the district court in Hudson asserted that in
both cases, the plaintiff challenged a national
bank's practice of imposing finance charges allowed
by its home state on its out-of-state customers
whose states of residence would outlaw such charges.
136
Additionally, the district court analogized the case
with that in an Eighth Circuit decision, Krispin v.
May Dep't Stores Co. 137 In Krispin, the defendant,
a Missouri department store, issued credit cards to
the plaintiffs in Missouri. 138 Later, the store
assigned its entire interest in the credit cards to
a national bank in Arizona. 139 The store then
issued a notice to the plaintiffs stating that the
Arizona national bank was extending credit. 140 The
store, however, purchased the credit card
receivables originated by the bank on a daily basis
and collected and received cardholders' payments.
141 The plaintiffs sued the store, alleging that the
late fees charged on their credit card violated
Missouri law. 142
In support of the position that the National Bank
Act did not apply, the plaintiffs in Krispin
asserted: (1) the plaintiffs entered into their
credit agreements with the Missouri store, (2) the
Missouri store "remained substantially involved in
the collection process," and (3) the Missouri store
retained a financial interest in the accounts even
after assigning its interest to the Arizona national
bank. 143 The Eighth Circuit held that the National
Bank Act applied to the credit agreements. 144 In
deciding whether the National Bank Act applied, the
Eighth Circuit stated [*333] that the originating
entity (in that case, the bank) served as the
determinative factor. 145 Relying on Krispin, the
Court in Hudson granted the defendants' motion to
dismiss. 146
Although the district court for the Eastern District
of North Carolina, in Goleta Nat'l Bank v.
Lingerfelt, ruled consistently with the purpose of
the National Bank Act, the federal court's reasoning
in Hudson proves most consistent with that of the
Supreme Court in Marquette. 147 The federal court in
Hudson refused to sacrifice form for substance in
determining preemption under the National Bank Act.
148 The court failed to inquire as to the identity
of the real lender - Goleta National Bank or Ace
Cash Express. 149 In determining preemption under
the Act, the identity of the true lender proves
essential even when form is not compromised in
interpreting the Act. 150
IV. Payday Lender and National Bank Partnerships in
the Future
As state legislatures and courts attack partnerships
between payday lenders and national banks, payday
lenders are beginning to take drastic measures to
keep their business alive. 151 Check "n Go serves as
a payday lender, with 670 outlets in twenty-four
states. 152 Recently, the investors who own Check "n
Go's parent company, CNG Financial Inc., created a
company to purchase a bank. 153 That company,
Cincinnati BancGroup Inc., applied to the Federal
Reserve Bank of Chicago to acquire Bank of Kenney in
Illinois, and thereby become a bank holding [*334]
company. 154 This is the first time a payday lender
has ever attempted to buy a bank. 155
Opponents argue that Cincinnati BancGroup is trying
to circumvent state usury laws that ban or restrict
payday lending. 156 They assert that approving the
purchase would encourage payday lenders with
sufficient funds available for such a purchase to
buy small banks. 157 An attorney at the National
Center on Poverty Law in Chicago said the opponents
fear that the payday lender would be incorporated as
part of the Bank of Kenney. 158 Under the National
Bank Act, the bank could then "export" to other
states the high rates permitted by Illinois usury
law. 159 Thus, buying the Bank of Kenney would allow
CNG Financial Services, Inc. to forego partnering
with another bank in order to export the high rates
permitted by the state of organization of that
particular bank. 160 Opponents stress that Check "n
Go notoriously facilitates federal laws in order to
avoid consumer protection laws. 161 For instance,
Check "n Go has been providing payday loans to
consumers in North Carolina, where payday lending is
illegal. 162 Check "n Go accomplished this by acting
as a broker of short-term loans for a national bank
in Illinois. 163
Protesting the purchase are four members of
Illinois' congressional delegation. 164 Questioning
CNG Financial Inc.'s business plan, they urged that
a public hearing be held to "discuss [*335] the
negative ramifications of a payday lender becoming a
bank." 165 They stated: "If the application is
approved, we believe it will make a sham of the
integrity of the banking regulatory framework by
allowing Cincinnati BancGroup to use bank privileges
to make predatory, high-cost payday loans." 166
Countering this claim, John Bruno, Cincinnati
BancGroup's President and Senior Vice President of
CNG Financial, Inc., said owning a bank would
facilitate access to funds from Federal Home Loan
Banks and other sources. 167 Furthermore, Bruno
stated that the purchase would help Cincinnati
BancGroup raise equity capital more successfully
than it could as CNF Financial, Inc. 168
As a result of the crackdown on partnerships between
payday lenders and national banks, banks are leaving
the business. 169 Recently, at least three banks
have voluntarily left the practice of payday
lending. 170 Brickyard Bank of Lincolnwood, Illinois
announced that the bank was terminating its
partnerships with payday lenders. 171 Specifically,
Brickyard Bank's Chairman, President, and Chief
Executive Officer, David L. Keller, cited a
September 3, 2002 order by the Federal Deposit
Insurance Corp. (FDIC) and the Illinois Office of
Banks and Real Estate as the reason for the bank's
decision. 172
The order required the bank, a company with $ 200
million in assets, to raise its capital by one
dollar for every one dollar outstanding in payday
loans. 173 Keller said that this order made payday
lending "too expensive" for Brickyard Bank. 174 As
reason for the order, the FDIC and the Illinois
Office of Banks and Real Estate charged Brickyard
Bank with "operating with an [*336] inadequate level
of capital protection for the kind and quality of
assets held." 175 The order also stated that
Brickyard Bank did not monitor Check "n Go properly.
176 Stating that the FDIC was following supervisory
guidelines issued by federal banking agencies, a
spokesman for the FDIC said, "This guidance
indicates that we'll ask banks to hold increased
reserves, including dollar-for-dollar capital for
riskier lending activities on a case-by-case basis."
177
Other banks are not as quick to leave the business.
178 Upon hearing that Brickyard Bank terminated its
partnership with Check "n Go, a number of other
banks contacted Check "n Go, hoping to enter the
business. 179 Although forced to stop payday lending
in Indiana, Republic First Bancorp, Inc. of
Philadelphia plans to continue such business. 180
The company continues to look for payday lending
opportunities, and the company's president, Harry
Madonna, said short-term loans would remain one of
the company's endeavors, "despite the setback in
Indiana and the general controversy surrounding the
relationships." 181
Although Brickyard Bank left the business, the
bank's Chairman, President, and Chief Executive
Officer, David L. Keller, stated that he believes
consumer need for payday lending exists and that
payday lending can be a profitable service for banks
despite the risks. 182
VI. Conclusion
While the payday lending industry is being attacked
by state legislation, pending federal legislation,
the OCC, and in suits across the country, the
industry finds a shield in the National Bank Act.
183 By partnering with national banks, payday
lenders find [*337] refuge under the National Bank
Act's allowance of interest rate exportation. 184
These partnerships allow payday lenders to charge
interest rates that otherwise would be illegal in
states with restrictive usury laws. 185
Enacted in the nineteenth century, the National Bank
Act sought to advantage weaker federal banks and
state banks. 186 The Act did not seek to provide a
loophole for payday lenders, nor could those
enacting the legislation even envision such a
purpose. 187 Payday lending is a modern problem
finding refuge in long-standing legislation. 188
When the national bank's involvement is facially
minimal, the National Bank Act should not provide an
avenue for payday lenders to escape state laws. 189
To allow this is to permit federal legislation to
trump state legislation on an issue that the federal
legislation was not meant to address. 190
While a significant demand for the short-term loans
as provided by payday lenders is evident by the
explosion of the industry in recent years, the
customer's need is exactly what gives the lender
leverage. 191 When states adopt laws to prevent
lenders from charging excessive interest rates,
these laws should not be circumvented by a federal
act never envisioned to apply to such an issue. 192
Until the courts look substantively to the
administration of payday loans, the states'
prerogative to outlaw payday lending will continue
to collapse in the face of the National Bank Act.
Legal Topics:
For related research and practice materials, see the
following legal topics:
Banking Law > Federal Acts > National Bank Act
Contracts Law > Defenses > Usury
Banking Law > National Banks > Affiliates &
Subsidiaries
FOOTNOTES:
n1. Scott Andrew Schaaf, From Checks to Cash: The
Regulation of the Payday Lending Industry, 5 N.C.
Banking Inst. 339, 340 (2001).
n2. Id. In the 1980s, deregulation of banking drove
banks to eliminate services that lost money, such as
bank accounts with small balances and free checking
accounts. Lisa Blaylock Moss, Modern Day Loan
Sharking: Deferred Presentment Transactions & the
Need for Regulation, 51 Ala. L. Rev. 1725, 1732
(2000).
n3. Schaaf, supra note 1, at 340.
n4. Id. at 339.
n5. Paul Beckett, U.S. Tells Bank to End Support of
Payday Loan, Wall St. J., Jan. 4, 2002, at C15.
n6. Schaaf, supra note 1, at 341. Thus, the borrower
must have a checking account against which he writes
a post-dated check. See id. The check cannot be
cashed until its date, which is presumably after the
borrower's next payday. See id. at 342.
n7. Id. at 341.
n8. Id.
n9. Id. at 342.
n10. Id.
n11. Moss, supra note 2, at 1729.
n12. Schaaf, supra note 1, at 342.
n13. Lynn Drysdale & Kathleen E. Keest, The
Two-Tiered Consumer Financial Services Marketplace:
The Fringe Banking System and Its Challenge to
Current Thinking About the Role of Usury Laws in
Today's Society, 51 S.C. L. Rev. 589, 602 (2000).
n14. Beckett, supra note 5, at C15. In North
Carolina, average payday loans charge 400 percent
and greater interest rates. Payday Lending in North
Carolina, Borrowers Trapped in a Cycle of Debt (July
29, 2002), at http://www.responsible lending.org/pdfs/Payday___Lending___Trapped___in&usco
re;Debt___072902.pdf (last visited Feb. 15, 2002).
By comparison, credit card rates typically range
from twenty-one to thirty-five percent. Id.
n15. See Party Yards Inc. v. Templeton, 751 So. 2d
121, 123 (Fla. Dist. Ct. App. 2000).
n16. See Paul Beckett, Risky Business: Exploiting a
Loophole, Banks Skirt State Laws on High Interest
Rates, Wall St. J., May 25, 2001, at 1. In recent
years, Virginia's attorney general has sued payday
lenders, effectively removing them from the state.
Id.
n17. Charles A. Bruch, Taking The Pay Out of Payday
Loans: Putting An End to the Usurious and
Unconscionable Interest Rates Charged By Payday
Lenders, 69 U. Cin. L. Rev. 1257, 1261 (2001).
n18. See Ben Jackson, Federal Courts at Odds Over
Payday Lending Pact, Am. Banker, June 6, 2002, at 5;
see also Beckett, supra note 5, at C15.
n19. See infra notes 23-30 and accompanying text.
n20. See infra notes 31-50 and accompanying text.
n21. See infra notes 51-150 and accompanying text.
n22. See infra notes 151-182 and accompanying text.
n23. Official Staff Interpretations (Commentary to
Regulation Z), 12 C.F.R. 226 (2000).
n24. FTC, in First Move Against Payday Lenders,
Reaches Settlement with Nevada Companies, 69 U.S.
Law Wk., Sept. 19, 2000, at 2151.
n25. See Schaaf, supra note 1, at 356.
n26. See Party Yards, Inc. v. Templeton, 751 So. 2d
121, 123 (Fla. Dist. Ct. App. 2000). The Court in
Party Yards held that to establish that a
transaction is usurious, the party must show: (1) an
express or implied loan, (2) a requirement for
repayment, (3) an agreement to pay interest in
excess of the legal rate, and (4) a corrupt intent
to take more than the legal rate. Id. The Court
noted that corrupt intent is established if the
evidence indicates that the lender knowingly charged
or received interest in excess of the legal rate,
considering all of the surrounding circumstances.
Id.
n27. Bruch, supra note 17, at 1260.
n28. Id. at 1260-61. Twenty states require payday
lenders to comply with usury restrictions. Id.
n29. Id. at 1261. Eight states allow payday lenders
to charge any interest rate they choose. Id.
n30. Id. Twenty-two states and the District of
Columbia have specific payday loan statutes. Id.
n31. Id.
n32. Id. at 1262.
n33. See 12 U.S.C. 85 (2001).
n34. Bruch, supra note 17, at 1262. In Tiffany v.
Nat'l Bank of Missouri, the Supreme Court
articulated the purpose of the legislation:
It cannot be doubted, in view of the purpose of
Congress in providing for the organization of
National banking associations, that it was intended
to give them a firm footing in the different States
where they might be located. It was expected they
would come into competition with State banks, and it
was intended to give them at least equal advantages
in such competition. In order to accomplish this
they were empowered to reserve interest at the same
rates, whatever those rates might be, which were
allowed to similar State institutions. This was
considered indispensable to protect them against
possible unfriendly State legislation.
Tiffany v. National Bank of Missouri, 85 U.S. 409,
412 (1873).
n35. See 12 U.S.C. 85.
n36. See Bruch, supra note 17, at 1262.
n37. Drysdale & Keest, supra note 13, at 646; see
also Cades v. H & R Block, Inc., 43 F.3d 869, 873-74
(4th Cir. 1994) (holding that an out-of-state bank's
use of a local agent to make loans did not affect
the preemptive force of the National Bank Act).
n38. Drysdale & Keest, supra note 13, at 646.
n39. See Bruch, supra note 17, at 1262.
n40. See Marquette Nat'l Bank v. First of Omaha
Serv. Corp., 439 U.S. 299, 319 (1978).
n41. Beckett, supra note 5.
n42. Bruch, supra note 17, at 1262 (citing Senate
Forum on Short-Term, High-Interest Paycheck
Advances, Before the Senate Comm. On Governmental
Affairs, 106[su'th'] Cong. (1999) (forum held by
Sen. Joseph Lieberman), available at 1999 WL
1242421, at 27).
n43. Ben Jackson, Brickyard is Latest to Quit Payday
Lending, Am. Banker, Sept. 18, 2002, at 1.
n44. Drysdale & Keest, supra note 13, at 604-05.
n45. Beckett, supra note 5, at C15.
n46. Id.
n47. See 12 U.S.C. 1831d (2001).
n48. See Greenwood Trust v. Mass., 971 F.2d 818
(1[su'st'] Cir. 1992).
n49. 12 U.S.C. 1831d.
n50. Id.
n51. See John Reosti, Why Republic First Still Likes
Tax, Payday Loans, Am. Banker, July 2, 2002, at 1.
n52. Beckett, supra note 16, at 1.
n53. See id.
n54. Schaaf, supra note 1, at 359.
n55. Kamal Wallace, State Lawmakers Look at Ways to
Regulate Payday Lending (October 1, 2002), at
http://www.wral.com/money/1696034/detail.html.
n56. Reosti, supra note 51, at 1.
n57. Id.
n58. Id.
n59. Id. Republic First Bancorp, Inc. first entered
the payday lending business when it partnered with
Check Into Cash, Inc., a payday lender located in
Cleveland, Tennessee. Id.
n60. Beckett, supra note 5, at C1.
n61. OCC Consent Order No. 2001-104 (January 3,
2002), available at
http://www.occ.treas.gov/ftp/eas/ea2001-104.pdf.
Dollar Financial Group had been offering Eagle
National Bank's loans in forty states. See Beckett,
supra note 5, at C1.
n62. Beckett, supra note 5, at C1.
n63. Id.
n64. Id.at C15 (quoting Comptroller of the Currency
John D. Hawke, Jr.).
n65. Id. (quoting Comptroller of the Currency John
D. Hawke, Jr.).
n66. Id.
n67. Id.
n68. Id. (quoting Comptroller of the Currency John
D. Hawke, Jr.).
n69. Id. (quoting Comptroller of the Currency John
D. Hawke, Jr.).
n70. Id. (quoting Jean Ann Fox, consumer protection
director at the Consumer Federation of America).
n71. Id. (quoting Jean Ann Fox, consumer protection
director at the Consumer Federation of America).
n72. Paul Beckett, "Payday' Loans Are Dealt Blow By
Regulators, Wall St. J., Oct. 30, 2002, at C1.
n73. OCC Consent Order No. 2002-93 (October 29,
2002), available at
http://www.occ.treas.gov/ftp/eas/Goleta%20Consent.pdf.
Goleta National Bank is located in Goleta,
California and has $ 302 million in assets. Jackson,
supra note 43, at 1. Ace Cash Express, Inc. is based
in Irving, Texas. Id.
n74. Jackson, supra note 43, at 1. In August, more
than 600 customer files were discarded in a dumpster
in Portsmouth, Virginia. Id. A spokesperson for the
OCC said this discarding could have compromised the
customers' right to privacy. Id. Ace Cash Express
was unable to account for 641 of those files. Id.
n75. Id.
n76. Id. The OCC also required Goleta to notify all
borrowers whose loan files were lost and to advise
those customers on potential identity theft. Id.
n77. Id.
n78. OCC Cease & Desist Order No. AA-EC-02-03 (May
17, 2002), available at http://www.occ.treas.gov;
Jackson, supra note 43, at 1.
n79. Jackson, supra note 43, at 1.
n80. See id.
n81. See H.R. 1319, 107th Cong. (2001).
n82. See id. at 3-4.
n83. See id. at 13. The bill proposes: "To amend the
Consumer Credit Protection Act and other banking
laws to protect consumers who avail themselves of
payday loans from usurious interest rates and other
unfair practices by payday lenders, to encourage the
states to license and closely regulate payday
lenders, and for other purposes." Id. at 1.
n84. See id. at 4-5.
n85. See id. at 13.
n86. See Marquette Nat'l Bank v. First of Omaha
Serv. Corp., 439 U.S. 299, 302 (1978).
n87. Id. at 299.
n88. Id. at 299.
n89. Id. at 301.
n90. Id.
n91. See id. at 301-02.
n92. See Schaaf, supra note 1.
n93. See Marquette Nat'l Bank v. First of Omaha
Serv. Corp., 439 U.S. 299, 302 (1978).
n94. See id.
n95. See id. at 307-08. The Court declined to rule
on the issue in the case of an agent of the national
bank purporting to extend credit. See id.
Accordingly, the Court's reasoning for its holding
bears no implication for payday lenders. Id. at 308.
It merely affirmed the National Bank Act's allowance
of national banks to charge interest rates permitted
by their home states. See id. The Court declared
that the First National Bank of Omaha was a national
bank, and thus, it was an "instrumentality of the
federal government, created for a public purpose,
and as such necessarily subject to the paramount
authority of the United States." Id. After asserting
that the interest rate that the First National Bank
of Omaha charged is governed by federal law, the
Court stated that the National Bank Act "plainly
provides that a national bank may charge interest
"on any loan' at the rate allowed by the laws of the
State in which the bank is "located.'" Id.
Therefore, said the Court, if the Bank was "located"
in Nebraska, it would be entitled to charge its
Minnesota customers the rate of interest authorized
by Nebraska law. Id. Interestingly, Marquette argued
that "in the context of a national bank which
systematically solicits Minnesota residents for
credit cards to be used in transactions with
Minnesota merchants the bank must be deemed to be
"located' in Minnesota for purposes of this credit
card program." Id. at 310. The Court disagreed. Id.
Stating that a national bank was "located" in the
state named in its organization certificate, the
Court asserted that the First National Bank of Omaha
"cannot be deprived of this location merely because
it is extending credit to residents of a foreign
state." Id. The rationale the Court offered is that
"Minnesota residents were always free to visit
Nebraska and receive loans in that State." Id.
n96. See Jackson, supra note 18, at 5.
n97. See Goleta Nat'l Bank v. Lingerfelt, 211 F.
Supp. 2d 711, 711 (E.D.N.C. 2002). Hal D. Lingerfelt
served as the Commissioner of Banks of North
Carolina. Id. The Honorable Roy Cooper was also
named as a defendant in his official capacity as the
Attorney General of North Carolina. Id.
n98. Id. at 713.
n99. Id.
n100. Id. The suit was filed in the Superior Court
of Wake County, North Carolina. Id.
n101. Id; see N.C. Gen. Stat. 24-1.
n102. Goleta Nat'l Bank, 211 F. Supp. 2d at 711.
n103. See id. at 713.
n104. See id. at 711.
n105. Ben Jackson, Ace, N.C. Reach Settlement But
Disagree on the Results, Am. Banker, Dec. 18, 2002.
n106. Id.
n107. Payday Lender Agrees to StopMaking High-Fee
Loans, Raleigh News & Observer, Dec. 15, 2002, at
4B. Ace Cash Express, with at least 16 branch
offices in North Carolina, was charging an effective
annual percentage rate of 443 percent. Id.
n108. Id.
n109. See Goleta Nat'l Bank, 211 F. Supp. 2d at 713.
n110. Id. at 714.
n111. Id.
n112. Id. at 711.
n113. Id. at 714.
n114. Id. at 711.
n115. Id.
n116. See id.
n117. Id. at 718.
n118. Id. at 717-18.
n119. See 12 U.S.C. 85 (2001).
n120. Bruch, supra note 17, at 1262.
n121. See 12 U.S.C. 85.
n122. See Bruch, supra note 17, at 1262.
n123. See Jackson, supra note 18, at 5.
n124. Hudson v. Ace Cash Express, Inc., 2002 WL
1205060, at 1 (S.D. Ind. May 30, 2002).
n125. Id. The plaintiff argued that the loan
violated Indiana usury law, the federal Truth in
Lending Act, and the federal Racketeer Influenced
and Corrupt Organizations Act. Id. Because Hudson
asserted two claims arising under federal law, the
United States District Court for the Southern
District of Indiana exercised supplemental
jurisdiction over her state law claims. Id.
n126. Id.
n127. Id.
n128. Id. at 4.
n129. Id.
n130. Id.
n131. Id.
n132. Id.
n133. See supra notes 86-95 and accompanying text;
Hudson, 2002 WL 1205060, at 4.
n134. Marquette Nat'l Bank v. First of Omaha Serv.
Corp., 439 U.S. 299, 318 (1979); see Hudson, 2002 WL
1205060, at 4.
n135. Marquette Nat'l Bank, 439 U.S. at 319; see
Hudson, 2002 WL 1205060, at 4.
n136. Hudson, 2002 WL 1205060, at 4.
n137. See id.
n138. See Krispin v. May Dep't Stores Co., 218 F.3d
919, 921 (8th Cir. 2000); Hudson, 2002 WL 1205060,
at4.
n139. Krispin, 218 F.3d at 921-22.
n140. Id.
n141. Id. at 923.
n142. Id. at 922.
n143. See id. at 923.
n144. See id. at 922-23.
n145. Id. at 922-24.
n146. See Hudson v. Ace Cash Express, Inc., 2002 WL
1205060, at 8 (S.D. Ind. May 30, 2002).
n147. See id; Marquette Nat'l Bank v. First of Omaha
Serv. Corp., 439 U.S. 299, 301 (1979); Goleta Nat'l
Bank v. Lingerfelt, 211 F. Supp. 2d 711, 718 (2002).
n148. Hudson, 2002 WL 1205060, at 4.
n149. See id.
n150. See Goleta Nat'l Bank, 211 F. Supp. 2d at
717-18.
n151. See Ben Jackson, Can't Rent? Payday Shop Files
to Buy a Charter, Am. Banker, July 9, 2002, at 1.
n152. See id.
n153. Id.
n154. Id. The chairman of Bank of Kenney stated that
the Bank was not looking for a buyer; Cincinnati
BancGroup approached it. Id. at 1, 6.
n155. Id.
n156. Id.
n157. See Jackson, supra note 151, at 6. The Federal
Reserve Bank of Chicago has received 50 comment
letters, most opposing the purchase. Id.
n158. Id.
n159. Id.
n160. See id.
n161. See id.
n162. See id.
n163. Jackson, supra note 151. Check "n Go acts as a
broker for Brickyard Bank, located in Lincolnwood,
Illinois. Id. Brickyard Bank has $ 193 million in
assets. Id. But recently Brickyard Bank announced
that the bank was terminating its partnerships with
payday lenders. Jackson, supra note 43.
n164. Jackson, supra note 151. Those four members
are Representatives Danny K. Davis, Jesse L.
Jackson, Jr., Bobby L. Rush, and Janice D.
Schakowsky. Id. All are Democrats. Id.
n165. Id.
n166. Id.
n167. See id.
n168. See id.
n169. See Jackson, supra note 43.
n170. Id.
n171. See id.
n172. See id.; see FDIC Cease and Desist Order,
available at http://www.fdic.gov/
bank/individual/enforcement/11967.html (last visited
Feb. 15, 2003).
n173. Jackson, supra note 43.
n174. See id.
n175. See Jackson, supra note 43.
n176. Id.
n177. Id.
n178. See id.
n179. See id.
n180. See Reosti, supra note 51.
n181. See id.
n182. See Jackson, supra note 43.
n183. See supra notes 31-150 and accompanying text.
n184. See Hudson v. Ace Cash Express, Inc., 2002 WL
1205060, at 4 (S.D. Ind. May 30, 2002). But see
Goleta Nat'l Bank v. Lingerfelt, 211 F. Supp. 2d
711, 718 (2002).
n185. See Drysdale & Keest, supra note 13, at
646-47.
n186. See Bruch, supra note 17, at 1262.
n187. See 12 U.S.C. 85 (2001).
n188. See Schaaf, supra note 1, at 339.
n189. See Goleta Nat'l Bank, 211 F. Supp. 2d at 718.
n190. See 12 U.S.C. 85.
n191. See Schaaf, supra note 1, at 345.
n192. See 12 U.S.C. 85.
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