Cash advance loan stores were violating state lending laws

The state of North Carolina has closed all of the stores of three payday lending companies after the Attorney General’s office discovered that the stores were circumventing state lending laws by funneling their loans through out of state banks. Check into Cash, Check ‘n Go and First American Cash Advance have not only closed their combined 152 stores, but they have also agreed to pay $700,000 to the state to be used for credit counseling services and they will stop collecting interest and fees on outstanding loans. They will continue efforts to collect outstanding principal balances, however.

Payday loans are short term loans that are normally extended for periods of two weeks in order to tide borrowers over until their next payday. The loans, which usually range from $100-500, come with a fee that ranges from $10-30 per $100 borrowed. The borrower pays with a postdated check, which the lender can cash at the end of the loan period. The fees are considered to be interest by the state, and as interest, these fees can amount to anywhere from 250-1000% annually, a figure that dwarfs the interest rates charged for other types of lending. Many customers become so burdened by these loans that they are forced to take out a second one to pay the first one, which can start an endless cycle of debt. 

Thirty eight states currently permit these loans, which are also known as cash advance loans. The practice is strictly regulated, however, and most states have restrictions regarding the length of the loans, the amount that may be lent, and the amount of the fees that may be charged. In some states, lenders have been able to legally circumvent local lending laws by collaborating with out of state banks located in jurisdictions that permit higher interest rates. One such state with lax payday loan rules is South Dakota, and hundreds of banks have located there as a result.

The skirting of lending laws works when the lender claims that the loan is actually issued in the state where the bank resides, rather than in the state where the store resides. If a North Carolina lender were doing business with a South Dakota bank, then the lender would claim that the loan was actually being issued in South Dakota, rather than in North Carolina. This practice works better in some places than in others; apparently, the North Carolina Attorney General was not swayed by this argument.

North Carolina’s cash advance law expired in 2001. At that time, most lenders closed their doors. Those that remained did so by using the services of out of state banks. It would appear that this practice has now ground to a halt, as all three companies have agreed to settle with the state and close their doors for good.

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