It's Payday for the Loan Sharking Industry
by Freddie Barber and Craig Savell
Originally published in the Arkansas Democrat-Gazette on May 14, 2000

Here’s a trick question: If a financial transaction looks like a loan, and acts like a loan, is it a loan? Well, not any more according to Arkansas law. The Arkansas Legislature, at the behest of the payday loan industry, passed Act 1216 in 1999 seemingly changing the definition of payday lending. Lending small amounts of money for short periods of time at exceptionally high interest rates is no longer confined to smoke-filled backrooms and organized crime. It’s moving into the state with slick advertising campaigns meant to pull the most vulnerable into a financial trap that some may not escape from.
     Former Attorney General Bryant successfully sued and shut down at least two of these operations because they were violating Arkansas’ strong usury protections in our constitution. With Act 1216, the industry found a trick an pushed through the Arkansas legislature a law that redefines their unfair loans as ”deferred presentment check cashing.” This allows payday lenders to call their charges for these loans “fees” instead of interest. These “fees” act an awful lot like interest, which can exceed over 1000 percent. The law is an attempt to bypass our usury laws, regulations and disclosure requirements that apply to all other loans.
     Here’s how it works. A customer writes a personal check for the needed cash plus a fee. The lender knows that the borrower does not have sufficient funds to cover the check, so they agree to advance cash but hold the check until a specified date-usually the next payday. On that date, the borrower can redeem the check with cash or allow the check to be deposited. The interest rates for providing this “service” are astronomical. To receive $100, a borrower can be required to write a check of $122.22 for a loan as short a 6 days. That equates to an annual percentage rate (ARP) of 1352 percent.
     When faced with the prospect of being prosecuted for passing a bad check and having to pay a bounced check fee to their bank and the merchant, some view the $22 for a $100 loan as a reasonable deal. However, payday loans are more properly compared with other sources of small loans. According to the Consumer Federation of America, the average payday loan is 485 percent APR, making the infamous title loan industry’s usurious rates seem like a bargain. When compared to limits set by Arkansas’ Constitutional usury cap, $22 on $100 seems more like a heist than a deal. Under the usury cap, lenders may charge no more than the Federal Discount Rate plus 5 percent. Currently, this would translate into a rate of approximately 11 percent. 
     Desperate people write personal checks for money they don’t have at the time and still won’t have later. The payday lending industry often threatens to deposit the check and initiate criminal prosecution for bad check writing, so borrowers are forced to take out additional payday loans in even higher amounts, an endless cycle. Fees quickly compound, leaving borrowers unable to repay rapidly expanding debt. Provisions in the Arkansas law that attempt to ban rollovers don’t work. Rather than rolling over a debt with the same lender, borrowers simply take out multiple loans with multiple companies. Or they pay off their original loan, then take out another loan on the same exact day for the same amount of money, having paid additional fees.
     The deck is also stacked against borrowers who realize they’ve been ripped off. Who would know to file complaints with the State Board of Collection Agencies (SBCA), Division of Check Cashing? There is no requirement for the lender to disclose that to the borrower. The SBCA is an under-funded state office poorly equipped to handle consumer complaints with no 800 number, only one investigator to cover the over 300  lenders around the state, and very little enforcement authority. Furthermore, many lenders make mandatory arbitration a condition of getting loans, essentially leaving borrowers no option for legal redress.
     Numerous regulatory actions and court decisions are coming out against payday lenders around the country. State and federal courts consistently find that payday loan transactions are credit transactions,  not mere “check  cashing” as the industry argues. Most recently, the Federal Reserve Bank issued a decision that effectively states that payday lending is in fact a loan, and the Kentucky Supreme Court and a Tennessee federal judge ruled that deferring deposit was not exempt from usury laws and credit disclosures.
     The Arkansas Public Policy Panel recently started a Consumer Organizing Project that is working to organize folk who want the “check cashing” industry to play by the same rules as traditional lending institutions. Fortunately, lawyers like Todd Turner of Arkadelphia have declared war on this type of legal loan sharking that preys on those who live paycheck to paycheck, and can least afford the outrageous interest rates charged and the criminal prosecution threatened by the industry. Our officials should stand up for consumers and enforce the state’s usury laws. Arkansans who use these services deserve legal protections that secure their pocketbooks and their dignity. You can find out more about check cashing heists in Arkansas by calling the Arkansas Public Policy Panel at (501)376-7913, extension 13.