Opinion ID: 76988
Heading Depth: 2
Heading Rank: 3

Heading: The Relevant Federal and State Law

Text: As noted earlier, in Georgia, there is a 16% cap on the interest rate that instate payday stores, and even in-state banks, may charge for loans under $3,000. Georgia, however, cannot prevent an out-of-state bank from charging its higher home-state interest rates because § 27(a) of the FDIA authorizes a state-chartered bank to charge the interest rates allowed under the laws of its charter state in any 9 The agreement actually states that the maximum loan amount is “One thousand ($500) [sic] dollars.” The typo in the agreement is not relevant to any of the issues we are discussing. 10 Exhibit A to the agreement states that Advance America’s fee for collected loans is “$13.80 per $100.00 loaned.” 10 other state where it does business. Specifically, FDIA § 27(a) covers “any loan” of the out-of-state bank but addresses solely the interest-rate element of the loan, as follows: In order to prevent discrimination against State-chartered insured depository institutions, . . . such State bank . . . may, notwithstanding any State constitution or statute which is hereby preempted for the purposes of this section, . . . charge on any loan . . . interest . . . at the rate allowed by the laws of the State . . . where the bank is located . . . . 12 U.S.C. § 1831d(a). Georgia recognizes that the plaintiff out-of-state banks in this case are authorized to charge the high-interest rates of 400-500% under the laws of their charter states.11 Given § 27(a), Georgia cannot regulate or restrict out-of-state banks acting for themselves from charging these high-interest rates on out-of-state bank loans in Georgia. Georgia does not dispute that “any” means “any loan” of the out-of-state bank. As explained later, this is why Georgia has exempted outof-state banks throughout the payday loan Act in issue.
What Georgia says it has the power to regulate in the Act are in-state payday stores in these two ways: (1) to prohibit in-state payday stores from making 11 Plaintiff Bankwest and Community State Bank are chartered in South Dakota. Plaintiffs First Bank of Delaware and County Bank of Rehoboth Beach are chartered in Delaware. Both of these states permit their state banks to charge these high-interest rates of 400-500%. 11 payday loans directly to borrowers; and (2) to restrict in-state payday stores from acting as agents for exempt entities in the one circumstance where the in-state payday store holds the predominate economic interest in the payday loans. Specifically, in April 2004, the Georgia legislature enacted Senate Bill 157, 2004 Ga. Laws 440, now codified in Georgia Code Ann. §§ 16-17-1 to 16-17-10. The Act contains findings that even though the Georgia Attorney General had deemed payday loans with excessive interest rates to be illegal under previously existing state law, and even though the Georgia Industrial Loan Commissioner had issued cease-and-desist orders to payday stores, the payday stores have continued their usurious practices. Ga. Code Ann. § 16-17-1(b).12 The purpose of the Act, according to the legislative findings contained within it, is to provide “sufficient deterrents” to “cause this illegal activity to cease.” Id. The Act declares payday loans unlawful in Georgia. Specifically, the Act declares it “unlawful for any person to engage in any business . . . which consists in whole or in part of making, offering, arranging, or acting as an agent in the making of loans of $3,000 or less” if that loan violates, among other things, 12 The Georgia Act declares that “payday lending . . . is having an adverse effect upon military personnel, the elderly, the economically disadvantaged, and other citizens of the State of Georgia.” Ga. Code Ann. § 16-17-1(c). 12 Georgia’s usury laws. Id. §§ 16-17-2(a), (a)(1)(E), (a)(1)(G).13 Although § 16-17- 2(a) of the Act declares these payday loans unlawful, § 16-17-2(a)(3) grants an explicit exception to out-of-state banks under this section of the Act. See Ga. Code Ann. § 16-17-2(a)(3).14 Thus, the Act does not prohibit out-of-state banks from making payday loans at high-interest rates in Georgia. 13 The Act declares that payday loans are unlawful if they violate any number of Georgia’s consumer protection laws. Specifically, § 16-17-2(a) states: It shall be unlawful for any person to engage in any business, in whatever form transacted, including, but not limited to, by mail, electronic, the Internet, or telephonic means, which consists in whole or in part of making, offering, arranging, or acting as an agent in the making of loans of $3,000.00 or less unless: (1) Such person is engaging in financial transactions permitted pursuant to: (A) The laws regulating financial institutions as defined under Chapter 1 of Title 7, the “Financial Institutions Code of Georgia”; (B) The laws regulating state and federally chartered credit unions; (C) Article 13 of Chapter 1 of Title 7, relating to Georgia residential mortgages; (D) Chapter 3 of Title 7, the “Georgia Industrial Loan Act”; (E) Chapter 4 of Title 7, relating to interest and usury; (F) Chapter 5 of Title 7, “The Credit Card and Credit Card Bank Act,” including financial institutions and their assignees who are not operating in violation of said chapter; or (G) Paragraph (2) of subsection (a) of Code Section 7-4-2 in which the simple interest rate is not greater than 16 percent per annum; (2) Such loans are lawful under the terms of: (A) Article 1 of Chapter 1 of Title 10, “The Retail Installment and Home Solicitation Sales Act”; (B) Article 2 of Chapter 1 of Title 10, the “Motor Vehicle Sales Finance Act”; or (C) Part 5 of Article 3 of Chapter 12 of Title 44, relating to pawnbrokers . . . . Ga. Code Ann. § 16-17-2(a)(1) - (a)(2). 14 Payday loans are illegal in Georgia unless they are issued by a “bank chartered under the laws of another state and insured by the Federal Deposit Insurance Corporation . . . [that] is not operating in violation of the federal and state laws applicable to its charter . . . .” Ga. Code. Ann. § 16-17-2(a)(3). 13 Further, the main purpose of the Georgia Act is to regulate in-state payday lenders and not out-of-state banks. The Act exempts out-of-state banks from the definition of payday lenders and payday lending, § 16-17-1(a);15 it explicitly exempts out-of-state banks from the prohibited-conduct sections, §§ 16-17-2(a) and (b); it exempts out-of-state banks from the provision regulating choice of law and choice of forum clauses in loan contracts, § 16-17-2(c)(1);16 it exempts out-ofstate banks from the civil monetary penalties in §§ 16-17-3 and 16-17-4 because those provisions are limited to only violations of §§ 16-17-2(a) and (b), which exempt out-of-state banks; it revokes the business license of Georgia businesses and only if they engage in “payday lending,” the definition of which excludes outof-state banks, §§ 16-17-7, 16-17-1(a); it designates the site or location where “payday lending” takes place in Georgia a public nuisance and out-of-state banks are exempt from the definition of payday lending, §§ 16-17-8, 16-17-1(a). In 15 Section 16-17-1(a) defines payday lending and payday lenders for the purposes of the remainder of the Act. Payday lending is defined as “all transactions in which funds are advanced to be repaid at a later date . . . .” Ga. Code. Ann. § 16-17-1(a). Payday lenders are defined as “one who engages in such transactions.” Id. The first section of the Act then exempts out-ofstate banks from the definitions of both payday lending and payday lenders and states: “This definition of ‘payday lending’ expressly incorporates the exceptions and examples contained in subsections (a) and (b) of Code Section 16-17-2.” Ga. Code. Ann. § 16-17-1(a); see § 16-17- 2(a)(3). 16 For example, § 16-17-2(c)(1) is limited to “payday lender.” As explained above, the Act exempts out-of-state banks from the definition of payday lender, and, thus, § 16-17-2(c)(1) has no application to out-of-state banks. 14 short, the Act attempts to regulate in-state payday lenders and not out-of-state banks. In addition to prohibiting in-state payday stores from making payday loans directly, Georgia has declared agency arrangements between payday stores and exempt entities, where the payday store has “the predominant economic interest” in the loan revenue, to be an unlawful scheme or contrivance designed to allow the in-state payday stores to circumvent Georgia’s usury laws. Specifically, Georgia declares that the use of agency or partnership agreements between instate entities [payday stores] and out-of-state banks, whereby the in-state agent holds a predominate economic interest in the revenues generated by the payday loans made to Georgia residents, is a scheme or contrivance by which the agent seeks to circumvent . . . the usury statutes of this state. Ga. Code. Ann. § 16-17-1(c). It is this single type of agency or partnership relationship that Georgia regulates by the Act. Georgia has done so to prevent instate payday stores that keep the predominate economic interest in local payday loans from circumventing Georgia’s 16% cap by partnering with out-of-state banks. Section 16-17-2(b)(4) of the Act explicitly makes “[a]ny arrangement by which a de facto lender [payday store] purports to act as the agent for an exempt entity [out-of-state bank]” unlawful if the “entire circumstances of the transaction 15 show that the purported agent holds, acquires, or maintains a predominant economic interest in the revenues generated by the loan.” Id. § 16-17-2(b)(4) (emphasis added). The predominate economic interest requirement is fulfilled by one criteria: the in-state payday store receives over 50% of the revenue from the loan. Id.17 Because the prohibited agency conduct in § 16-17-2(b)(4) is subject to the exceptions in § 16-17-2(a), the Act also specifically exempts out-of-state banks from the reach of § 16-17-2(b)(4). See id. §§ 16-17-2(a)(3), (b). Again, the Act targets the conduct of in-state payday stores, not out-of-state banks. Thus, the Act has no application when out-of-state banks act for themselves or act through an in-state agent (even a payday-store agent) who is paid less then 50% of the revenue from a payday loan. If, however, an out-of-state bank enters into an agreement with an in-state payday store that allows the independent payday store to have the predominate economic interest (by earning more than 50% of the revenue from a payday loan), the payday store, and not the out-of-state bank, is liable for damages under the Act. Although the Act does not empower 17 The parties do not dispute that § 16-17-2(b)(4) affects only those transactions in which the plaintiff payday store has “the predominate economic interest” in the revenues from the payday loan. The parties also do not dispute that under the secondary agreements at issue, the plaintiff payday stores receive more than 50% of the revenues from the payday loan, and, thus, have the predominate economic interest in the payday loan. The question, thus, is whether Georgia can preclude in-state payday stores from entering into these agency agreements. 16 Georgia to prosecute an out-of-state bank directly as a principal party to the agency agreement, the Act does prohibit the in-state agent, acting pursuant to an unlawful contract, from collecting the payday loans and declares that the payday loans procured by the in-state payday store are void ab initio. See Ga. Code Ann. § 16-17-3. In addition, § 16-17-2(d) of the Act imposes penalties on payday stores that: (1) make payday loans directly in their own name; or (2) undertake to make prohibited secondary agreements between themselves and out-of-state banks, whereby the payday stores maintain the predominate economic interest from payday loans made in the bank’s name.18 See id. § 16-17-2(d).