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A federal judge was right not to delay the implementation of a Georgia law intended to regulate interest rates on so-called “payday” loans, a federal appellate panel has ruled. The decision, written by 11th U.S. Circuit Court Judge Frank M. Hull and joined by Senior Judge James C. Hill, noted that Georgia’s law was designed to prevent out-of-state banks from circumventing the state’s usury laws. But in a sharp dissent, Judge Edward E. Carnes declared that it was the state of Georgia that was attempting “to evade federal law.” Carnes argued that federal banking laws clearly pre-empt any state attempts to regulate interest rates charged by out-of-state banks. At issue is a Georgia law passed last year that limits finance charges on cash advances that use an individual’s paycheck as collateral. According to Hull, the law places caps on finance charges that had averaged 450 percent to 520 percent in annual interest or higher, in violation of state usury laws. In Georgia, the maximum legal annual percentage rate for loans of $3,000 or less is 16 percent. For loans greater than $3,000, the maximum permitted interest is 5 percent a month or an annual percentage rate of 60 percent. The new law bars in-state stores from making payday loans unless their finance charges conform to state usury laws. Out-of-state banks are exempt from Georgia usury laws because federal banking regulations allow a bank to charge the interest rates allowed by the state in which it is chartered, even if those rates are higher than permitted by another state in which that bank is operating. Georgia’s new payday law also bars an in-state payday loan store from acting as an agent for an out-of-state bank if the store, rather than the bank, makes the bulk of the profit on a payday loan. Shortly before the law took effect, in-state payday lending stores and out-of-state banks filed four suits seeking temporary restraining orders, and preliminary and permanent injunctions, barring its enforcement. Those suits, which eventually were consolidated, claimed that the new law was an unconstitutional violation of federal banking laws. U.S. District Judge Marvin H. Shoob refused to grant either a TRO or an injunction, finding that although the plaintiff banks and payday loan shops might, indeed, be irreparably harmed if the new law were enforced, they likely would not succeed in having the law declared unconstitutional. On appeal to the 11th Circuit, Hull and Hill agreed. RENT-A-BANKS Attorney General Thurbert E. Baker, who said his office worked with legislators to make sure the law would pass constitutional muster, said Monday that the state is not trying to get around federal banking laws, as Carnes argued in his dissent. Despite the federal regulations, Baker explained, states can exert “some control over the agency relationship” between out-of-state banks and in-state payday loan stores. Baker said that if an out-of-state bank opened a branch in Georgia, it could charge interest rates allowed by its home state. But out-of-state banks cannot, he added, employ “rent-a-bank” arrangements with in-state payday loan stores and not be subject to Georgia’s usury laws. Charles E. Campbell of McKenna Long & Aldridge, who represents payday loan companies Advance America and Cash Advance Centers of Georgia Inc., said he and attorneys for the co-plaintiff banks are studying the opinion but have not decided what the next step will be. He noted that Carnes’ dissent “is consistent with the main points that we had argued. Obviously, we are disappointed we lost 2-1.” But the dissent, he said, deserves consideration by the plaintiffs’ lawyers in planning their next step because it is “very strong.” Michael C. Russ of King & Spalding and A. William Loeffler and Martin M. Wilson of Troutman Sanders, who are representing Bankwest Inc., an out-of-state bank, could not be reached for comment. A SIMPLE CHANGE, HULL SAYS In her majority opinion, Hull argued that the main purpose of Georgia’s payday lending law “is to regulate in-state payday lenders and not out-of-state banks.” But, she added, “Georgia has declared agency arrangements between payday stores and exempt entities, where the payday store has ‘the predominant economic interest’ in the loan revenue, to be an unlawful scheme or contrivance designed to allow the in-state payday stores to circumvent Georgia’s usury laws.” A predominant economic interest, under the law, is more than 50 percent of the loan revenue, she wrote. Hull noted that Georgia’s payday lending law “does not prohibit out-of-state banks from using independent agents, including payday stores, or other partnerships to make payday loans at their home-state interest rates in Georgia. Rather, the act restricts out-of-state banks from only one limited type of agency: using a separate, in-state business entity in Georgia that holds ‘a predominant economic interest’ in the loan revenues.” It is relatively simple, she added, for out-of-state banks and in-state payday stores to continue with the same business model in place before the new law took effect. She suggested the banks modify any existing contract so that the payday store receives only 50 percent, as opposed to what has traditionally been 80 percent, of the generated finance charges. The new law, she concluded, is “nothing more than a narrow agency limitation on contracts between in-state payday stores and out-of-state banks.” ‘LOADED LANGUAGE’ Calling Hull’s opinion “factual spinning” using “loaded language” that partially guts federal banking law, Carnes argued that Georgia’s regulation of an out-of-state bank’s in-state agent was no different than regulating the bank. Federal law, Carnes wrote, “grants out-of-state banks the authority to make loans in Georgia at the interest rates they may charge in their charter states. The State of Georgia may no more prevent that authority from being exercised through in-state agents than it may prevent that authority from being exercised on even-numbered days.” Even though his colleagues might argue that Georgia’s payday lending law affects “one little bitty aspect” of the relationship between an out-of-state bank and its in-state agent, the reality, according to Carnes, “is that Georgia has acted to strip from out-of-state banks the right that [federal banking law] gives them, if those banks structure their business in the way that they think best in light of business considerations and market forces.” In doing so, Georgia “has effectively put a price on the exercise of the federal statutory right, the price being that banks cannot structure their business relationships the way they have chosen.” Carnes acknowledged “serious policy concerns” that motivated the General Assembly to enact the legislation — foremost among them that the state’s military personnel as well as its low-income population were often among those victimized by payday lenders’ exorbitant fees. “If I were in Congress I might well support” limits to payday interest rates, he wrote. “But I am not in Congress. Neither are my two colleagues who are in the majority in this case. Our duty is to interpret the laws that Congress enacted, not to shape them to our policy views.” The case is Bankwest v. Baker, No. 04-12420.

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