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ATLANTA – In a move being hailed by some consumer groups in what one described as “a major victory for state policymakers and advocates grappling with the debt trap of payday lending”, the 11th Circuit Court of Appeals issued a ruling June 10 that validates the ability of states to regulate “rent-a-bank” relationships between state-chartered banks and payday lenders. In issuing its ruling on case No. 04-12420, which was described as concerning “payday loans, which are small loans with interest rates averaging 400-500% APR due on the next payday,” the Court ruled that the Federal Deposit Insurance Act does not pre-empt Georgia’s state law on payday lending, nor does it interfere with its regulation of payday lenders seeking to avoid state law through rent-a-bank arrangements. The case listed as Plaintiffs-Appellants: Bankwest Inc., Advance America, and Cash Advance Centers of Georgia, Inc.; as Consolidated-Plaintiffs-Appellants: Community State Bank, First American Cash Advance of Georgia LLC, Cash America Financial Services Inc., Georgia Cash America Inc., First Bank of Delaware, CreditCorp of Georgia LLC, County Bank of Rehoboth Beach, Delaware, and Express Check Advance of Georgia LLC. Defendants-Consolidated Defendents-Appellees were: Thurbert E. Baker, Georgia Attorney General; and Georgia Secretary of State Cathy Cox. Both Community State Bank and Bankwest are out-of-state banks that have no physical locations in Georgia but offer payday loans in the state by contracting with independent, local payday stores in the second set of plaintiffs. In issuing its decision, the Circuit Court judges wrote that the, “The Georgia Act in issue, Ga. Code Ann. 16-17-1 to 16-17-10 (2004) targets Georgia businesses and precludes in-state payday stores from directly making payday loans in Georgia. No one challenges Georgia’s right to preclude in-state stores or even in-state banks from making payday loans at these high interest rates. “To avoid this direct prohibition, however, payday stores have entered into agency agreements whereby the stores procure such payday loans for out-of-state banks, but nonetheless, retain the predominate economic interest in the loans. To stop this practice, the Act restricts in-state payday stores from acting as agents for out-of-state banks in one, limited circumstance: where the agency agreement grants the in-state agent “the predominate economic interest” in the bank’s payday loan, which the parties agree means that the payday stores hold more than 50% of the revenues from the law.Georgia outlaws this one type of agency agreement to prevent in-state payday stores from circumventing Georgia’s usury laws and reaping the enormous revenues from payday loans. “The district court denied the plaintiffs’ motion for a preliminary injunction enjoining the enforcement of the Georgia Act. After review and oral argument, we conclude that the district court did not abuse its discretion in denying the plaintiffs preliminary injunctive relief.” In 2004, Georgia passed a law that addressed the state’s rent-a-bank payday lending problem by requiring payday lenders to comply with the state’s small loan law. The law explicitly applied to payday lenders that tried to avoid those state laws by partnering with out-of-state banks, while still retaining the “predominant economic interest” in the loans. According to the Center for Responsible Lending, after Georgia passed the law, a group of payday lenders and out-of-state banks sought an injunction against the law and claimed that the Georgia law was pre-empted by federal law. The circuit court denied their injunction and the payday lenders subsequently appealed to the 11th Circuit Court which has now affirmed the lower court’s ruling. According to Georgia’s usury laws, the maximum legal annual percentage rate for loans of $3,000 or less is 16% regardless if the loans are made by instate payday stores or instate banks. However, under the 27 of the Federal Deposit Insurance Act, a state-chartered bank is authorized to charge the rate of interest allowed under the laws of its charter state in any other state where it does business. So an out-of-state bank is not limited by Georgia’s 16% cap. To take advantage of that, the court’s report states “the local payday stores in this case have entered into arrangements with out-of-state banks to serve as their agents in Georgia. By doing so, the payday stores are marketing and procuring the high-interest rate loans in Georgia allowed in the charter states of the out-of-state banks.” The court’s ruling makes it clear that, “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; it explicitly exempts out-of-state banks from the prohibited-conduct sections; it exempts out-of-state banks from the provision regulating choice of law and choice of forum clauses in loan contracts; it exempts out-of-state banks from the civil monetary penalties.; it revokes the business license of Georgia businesses and only if they engage in payday lending.” The Act also 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. “In short, the Act attempts to regulate in-state payday lenders and not out-of-state banks,” the court’s ruling reads. Concerning field preemption, the court’s ruling states that “it is clear that the FDIA was not intended to “occupy the field” of state bank regulation.” With regard to conflict preemption, it states that “this is not a case where compliance with both the state and federal laws is impossible.” Instead, as explained under “Express Preemption,” the ruling states that.”this is obviously a case in which the federal statute preempts some forms of state law.” However, the judges concluded that 27(a) of the FDIA “does not expressly preempt 16-17-2(b)(4) of the Georgia Act, which precludes in-state payday stores from acting as agents for out-of-state banks when the payday store retains the redominate economic interest in the payday loan.” Commenting on the 11th Circuit Court of Appeals’ decision, CRL said “it recognizes that states have the ability to regulate payday lenders, even when they try to hide behind out-of-state bank partnerships.” -

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