Nixon: Payday Lenders Are Circumventing Law

After a March ruling from The Arkansas Supreme Court, it seemed the payday lending industry would be restructured and subject to strict regulation under state usury laws. Fayetteville lawyer David Nixon said that’s simply not the case.

The payday lending industry is as active as it’s ever been, Nixon said.

The legalities have had little affect on business within the industry, they’re merely changing their operations.

One of the few states with a usury law, Arkansas’ law is also one of the strictest.

The Arkansas Usury Law defines usurious lending as anything more than five percentage points above the Federal Reserve discount rate — a benchmark that no longer exists. The Federal Reserve eliminated its traditional “discount rate” — the rate at which it made short-term loans to member institutions — and replaced it with a two-tiered credit program in January. Not only is the state’s usury law tied to the discount rate, but rates on school and municipal bond issues are also linked to the discount rate.

The issue could only be completely settled by a constitutional amendment, which couldn’t be voted on by the public until November 2004 at the earliest. In the meantime, lenders are looking for an interim answer, and the most likely one seems to be to substitute the Fed’s new “primary credit” rate for the outmoded discount rate.

The primary credit rate is the lower of the two new rates created by the Fed’s new “Regulation A,” and it is the one available to generally sound institutions.

Robert Hopkins, manager of the Federal Reserve Bank of St. Louis’ Little Rock Branch, said the Fed considers the primary rate to be the “functional equivalent” of the former discount rate. But the Fed’s opinion has little to do with the application of state law.

An opinion issued Dec. 31 by outgoing Attorney General Mark Pryor at the request of Mac Dodson, president of the bond-issuing Arkansas Development Finance Authority, suggests that using the primary credit rate would make sense.

“Until such a definitive resolution of these issues is forthcoming, it is my opinion … that the approach most consistent with Arkansas precedent would be to interpret the phrase ‘Federal Reserve Discount Rate,’ as used in Amendment 60, as being equivalent to the ‘primary credit’ rate that is created by the new Regulation A,” Pryor said in the opinion, which was researched and written by Assistant Attorney General Suzanne Antley.

Check cashers are sidestepping the question. Most are conducting business via out-of-state banks, which enables them to evade Amendment 60 to the Arkansas Constitution.

As for the future of the payday advance industry, Nixon said, “It’s hard to say, the federal government has started to step in and control out-of-state loans, but they’ll still be in business, they’ll find a way.”

Nixon and his partner, Theresa Pockrus, represent clients who are in financial trouble with cash-advance businesses.

“Lenders continue to prey on the financially unstable, they’re devastating the lower economic class of our community,” Nixon said.

As for resolution to the problems, Nixon contends there is a possibility for some slow and likely unsuccessful efforts amongst the members of the U.S. Congress to tighten the discharge of bankruptcy debts.

“In order to actually see a change, Congress will have to enact a usury law of its own, which I would favor, that would be similar to banking regulations,” Nixon said.