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McDaniel Demands Termination of Payday Lending in Arkansas

LITTLE ROCK- Attorney General Dustin McDaniel announced today that he is sending letters to "payday lending" businesses operating under a license in Arkansas, asking them to stop the practice immediately. McDaniel defines "payday" lending as short term loans that charge interest in amounts that vastly exceed the usury limit imposed by the Constitution of the State of Arkansas.

Based on the strength of two recent Arkansas Supreme Court opinions, McDaniel is advising payday lenders that charging exorbitant interest rates on these loans violates both the constitutional limit and the Arkansas Deceptive Trade Practices Act, a law enforced by the Attorney General. McDaniel demands that the payday lenders cease their lending practices immediately, void any and all current and past-due obligations of their borrowers, and refrain from any collection activities related to these type loans. A failure to do so will likely result in the filing of a lawsuit by the Attorney General.

According to a 2005 study by the Center for Responsible Lending, it is estimated that payday lenders cost Arkansas consumers $25 million in fees and excessive interest each year.

"These businesses have made a lot of money on the backs of Arkansas consumers, mostly the working poor. Charging consumers interest in the range of 300 to 500 percent is unlawful and unconscionable, and it is time that it stops," McDaniel said. "It is my hope that they comply with my demand but, if they do not, I stand ready to take them to court."

A copy of the letter is below.


March 18, 2008


According to the records of the Arkansas State Board of Collection Agencies, [name of business] is currently engaged in the trade commonly known as "payday" lending. For the purposes of this letter, "payday" lending means the practice of extending short-term loans at relatively high annual percentage rates. The definition includes, but is not limited to, the practice described as a "deferred presentment option" as defined in Ark. Code Ann. 23-53-102.

The purpose of this letter is to advise you regarding the law in Arkansas as it applies to payday lending. Arkansas has a strong public policy against usury. Article 19, Section 13 of the Arkansas Constitution places a cap on the maximum interest rate that may be charged a borrower in a lending transaction:

(a) General Loans:
(i) The maximum lawful rate of interest on any contract entered into after the effective date hereof shall not exceed five percent (5%) per annum above the Federal Reserve Discount Rate at the time of the contract.

(b) Consumer Loans and Credit Sales: All contracts for consumer loans and credit sales having a greater rate of interest than seventeen percent per annum shall be void as to principal and interest and the General Assembly shall prohibit the same.

To the extent that your organization may have relied upon licensure under the Arkansas Check-Cashers Act of 1999 as a defense against usury, which is prohibited by the Arkansas Constitution, and claims under other applicable Arkansas laws, we believe that such reliance has been misplaced.

Starting with the case of Luebbers v The Money Store, 344 Ark. 232, 40 S.W. 3d 745 (2001), the Arkansas Supreme Court has addressed the conflict between the Arkansas Check-Cashers Act and the Arkansas Constitution. The Court ruled that "section 23-52-104(b) [of the Arkansas Check-Cashers Act] is an invalid attempt to evade the usury provisions of the Arkansas Constitution." Luebbers, 344 Ark. at 232. Subsequently, the General Assembly repealed that portion of the Act which purported to allow a check casher to treat the fees charged in a payday lending transaction as something other than interest.

More recently the Arkansas Supreme Court issued two opinions regarding payday lending, Arkansas Board of Collection Agencies and Old Republic Surety Company v. Mcghee, et al., No. 07-129 (AR S. Ct. Jan. 17, 2008), and Staton v Arkansas Board of Collection Agencies and American Manufactures Mutual Insurance Company, No. 07-53 (AR S. Ct. Feb. 21, 2008). In each case, the Court found that the practice of payday lending is unconscionable and deceptive, in addition to being prohibited by the Arkansas Constitution.

Taken as a whole, these Arkansas Supreme Court rulings make it clear that payday lending transactions, where the effective interest rate is greater than that allowed by the Arkansas Constitution, are prohibited. In the case of a typical payday loan, where the effective interest rate is far in excess of the legal limit, the loan is void as to both principal and interest. As a deceptive and unconscionable trade practice, the business of payday lending is prohibited by the Arkansas Deceptive Trade Practices Act (DTPA), and subject to the broad remedies provided by the DTPA, including the imposition of substantial civil penalties.

It is the position of this office that you must cease and desist your payday lending practices. In addition, I hereby demand that you void any and all current and past-due obligations of your borrowers, and refrain from any collection activities related to these payday loans. Be forewarned that your failure to comply with this demand will likely lead to litigation to enforce the laws of Arkansas.

I will expect a written response no later than Friday, April 4, 2008, informing me of whether you intend to comply with this demand. If, for some reason, you believe that your practices are not subject to the requirements and prohibitions of Arkansas law set out above, please contact my office immediately. Thank you for your cooperation in this matter.


Dustin McDaniel
Attorney General

All communications or questions may be directed to either:

Jim DePriest, Deputy Attorney General
323 Center St., Ste. 200
Little Rock, AR 72201

Charles Saunders, Asst. Attorney General
323 Center St., Ste. 200
Little Rock, AR 72201

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