Court: Payday lending law violated constitution

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A 1999 state law allowing so-called payday lenders to charge high fees for short-term loans violates the state constitution, the Arkansas Supreme Court ruled Thursday.

In a 6-0 decision, the court said the fees permitted under the 1999 Check Cashers Act were really triple-digit interest rates. The state constitution limits interest rates on loans to 17 percent.

"Because that fee is in reality an amount owed to the lender in return for the use of borrowed money, we must conclude that the fees authorized clearly constitute interest," Justice Paul Danielson wrote.

Through a payday loan in Arkansas, a customer writing a check for $400, for example, typically would receive $350. The lender would keep the check for about two weeks before cashing it.

The customer could buy back the check for $350 during that two-week period, but otherwise would pay the full $400 when the company cashed his check. The $50 charge on a $350 loan for 14 days equates to 371 percent, well above Arkansas' usury limit.

Attorney Todd Turner, who represented the plaintiffs who challenged the Check Cashers Act, said the ruling means it will be impossible for payday lenders to operate in the state.

"It's great for all the Arkansas residents who have been paying 600 percent for these loans," Turner said.

Tom Hardin, attorney for the Arkansas Financial Services Association that sought to preserve the law, did not immediately return a call seeking comment.

Even before Thursday's ruling, the number of payday lenders in the state has dwindled in response to threats of lawsuits from Attorney General Dustin McDaniel. An advocacy group said in a report last month that the number of payday lenders operating in the state has dropped from 237 in March to just 33.

In its 6-0 decision, the court overturned a Pulaski County judge who last year ruled that the 1999 act was constitutional.

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