Payday Lenders Booted from North Carolina

Payday lending is banned outright in a number of states, while many set an interest rate cap. Despite these laws, payday lenders have successfully operated in many of these states. They charge fees that amount to over 400% APR for short-term loans. One might ask, if the practice is illegal, then how are they doing it?

Payday lenders partner with an out-of-state bank that actually provides the loan. The payday lenders claim that they are merely facilitating an interstate commerce transaction. This limits them only by any usury laws present in the state where the bank is based. Banks naturally migrate to Delaware and other states that lack these consumer protections so that they fewer limitations on their services.

This rent-a-charter model has been attacked by the attorneys general of several states and has drawn the attention of federal regulators. NC Attorney General Roy Cooper argued that payday lenders were breaking state law. In December 2005, NC Commissioner of Banks Joseph Smith agreed that Advance America was in violation of state usury laws. With the largest payday lender effectively shut down in North Carolina, the 4 other major operators also followed suit.

As promised by Advance America, they appealed the decision. On May 24, 2006, the state Banking Commission rejected this appeal. Other states, including South Carolina, Tennessee and Pennsylvania are also building support for the removal of payday lenders from their states.

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