WASHINGTON - Banking lawyers say a recent appeals court decision upholding Georgia's payday lending law offers states a road map for subjecting banks to usury laws.
A three-judge panel of the U.S. Court of Appeals for the Eleventh Circuit in Atlanta issued a decision a week ago to uphold the 2004 law, which prohibits payday lenders from charging annual percentage rates above 16%.
The cap does not apply if a payday lender partners with an out-of-state bank and the bank receives a majority of the loan revenue, but the court still found fault with one such relationship. The court also said, generally, that the Federal Deposit Insurance Act, which allows banks chartered in other states to export interest rates, does not preempt the Georgia law, because the state is regulating only bank agents, not banks themselves.
BankWest Inc., Advance America, and several other banks and payday lenders had challenged the law immediately after it was enacted. But a district court refused to grant an injunction stopping the law from being enforced; the appellate court upheld the lower court decision and issued a 48-page opinion on why the law was valid.
The court also closely examined an arrangement between BankWest, a bank chartered in South Dakota, and Advance America in Georgia to make payday loans. High-cost loans would be considered legal if the bank received more than 50% of the revenue from the loans, but the majority found that was not the case.
"Although the out-of-state bank advances the initial loan funds, the payday stores market the loans, process applications, collect loans after maturity, submit reports about the loans to the out-of-state bank, and remit the loan payments to a local bank account in the out-of-state bank's name," Judge Frank M. Hull wrote for the majority. "The payday stores effectively do all the work and retain 81% of the loan revenues."
Judge Ed Carnes, in the dissenting opinion, said the Federal Deposit Insurance Act's provision allowing state banks to export the interest rates of their home states clearly preempts the Georgia law.
"The majority's point, I suppose, is that Congress did not say out-of-state banks could use in-state agents under the specific contractual terms" between BankWest and Advance America, Judge Carnes wrote. "Of course it didn't. It is impossible to anticipate all the ways in which business will be done, just as it is impossible to anticipate all the ways in which states will attempt to thwart the preemptive will expressed in a federal statute."
He went on to say: "In other words, the majority's 'quite narrow' view is that states may thwart the preemption clause of" the federal law "by regulating agency relationships or prohibiting preferred forms of them, and by going after the 'collateral activity associated with' making loans, activities that are essential for an out-of-state bank to function in another state."
Alan S. Kaplinsky, a partner at Ballard Spahr Andrews & Ingersoll LLP, represented several of the banks in the case. He said the impact of that reasoning goes well beyond the payday-lending statue.
"The majority opinion has thrown a dark cloud over the future of all interstate lending, including credit card, mortgage, auto, and other loans by national and state chartered banks," he said.
"Although the states still can't directly regulate the interest rate charged by an out-of-state bank, they can indirectly regulate such interest rates by regulating 'collateral activity associated with the loan.' "
Using the court's logic, states could enact laws "making it unlawful for a retailer to accept a credit card for the purchase of goods and services if the interest rate exceeds that state's usury ceiling," he said.
Mr. Kaplinsky said the banks and payday lenders involved will ask the full appeals court to rehear the case.
John Beaty, a partner at Venable LLP and former assistant general counsel at the FDIC, also said the court's reasoning was flawed and could have far-reaching effects.
"If the case stands, it might result in a substantial lessening of the availability of preemption generally," he said. "The idea that you can frustrate an out-of-state bank from lending into the state by imposing regulations on the agents of that out-of-state bank whenever the bank charges rates in excess of the state usury limits could be explosive if other states try to adopt similar laws."
