Cash advance loan stores work around the law

The quick cash loan industry is a booming industry, and people regularly line up to take out loans that cost up to 1000% per year. We aren’t sure why, as this is one of the most expensive methods of borrowing money in existence. The owners of the stores say that their customers are fully informed and are aware of the costs of the product, but they take the pricey loans out by choice.

Still, legislators around the country are concerned about an industry they view as inherently predatory and they are trying, with limited success, to put limits on the industry. North Carolina has tried, and so far failed, to put these stores out of business.

North Carolina passed a bill in 1997 that permitted cash advance loans, where a borrower takes out a short term loan of two weeks or so that is intended to hold him or her over until their next payday. The loans, which typically range from $100-500, include fees which average about $15 per $100 borrowed. On an annual basis, these fees, which most regard as interest, adds up to some 391% per year. Given that this is about twenty times the price that one would pay for a credit card loan, legislators are wise to be concerned about it. The stories of people who cannot repay the loans or who have to take out a second loan to repay the first one are rampant throughout the industry.

In 2001, North Carolina elected to let the law that permitted these loans to expire, rather than to renew it. The state apparently decided that these financial products were not in the best interest of the citizens of the state. Despite that, many payday loan stores continue to operate within the state to this very day. How do they get away with that if issuing such loans is illegal in North Carolina?

The answer is a simple one - the stores get their cash that they lend to customers from a bank in another state. Some states, such as South Dakota, have loose banking laws. In South Dakota, there is no limit regarding how much interest a lender may charge. In North Carolina, the limit is 36% per year. Clearly, anyone who lends money for a living would rather do so under South Dakota law than under North Carolina law and that is just what these stores do. The store is in North Carolina and the borrower is in North Carolina, but the paperwork is handled by a South Dakota bank. That, according to the lenders, means that the loan was granted in South Dakota and is subject to South Dakota law.

This is a matter for the legal system to decide, but for the time being, the NC Banking Commissioner has ordered one such company, Advance America, to stop doing business within the state. The company has appealed the ruling to the state’s banking commission and everyone in the state is waiting to see how the commission will rule.

This sort of thing goes on in many states that have tight usury laws and it is only a matter of time before the matter ends up in the hands of either Congress or the Supreme Court.

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