Official Opinion 2002-3
You have asked my opinion whether a license under the Georgia Industrial Loan Act, O.C.G.A. §§ 7-3-1 through 7-3-29 (hereinafter “the Act”) is required in order to offer short-term cash advances (commonly called “payday loans”) of $3000 or less. In addition, you have asked whether such cash advances are governed by the Act when offered in connection with catalog coupon sales, purchase-leaseback transactions, or similar consideration. It is my opinion that an industrial loan license is required to make “payday loans” of $3000 or less, unless the lender is exempt under O.C.G.A. § 7-3-6, and that “payday loans” are subject to the Act notwithstanding the lender’s use of token consideration such as catalog coupons or purchase-leaseback arrangements.
The Payday Loan
It is my understanding that the typical “payday loan” transaction involves an advance to the borrower of $500 or less which is due to be repaid within a short period of time, usually two weeks. The borrower gives a check to the lender in the amount of the advance, plus an additional amount representing the lender’s fee. The check is held by the lender until the advance is due to be repaid. At that time, one of three things will happen: the lender will negotiate the check, the borrower will redeem the check with cash, or the borrower will pay a fee for the privilege of extending the due date of the advance for another two weeks (referred to as a renewal or “rollover”). Payday lenders typically charge fees of between 20% and 30% for a two-week advance. Such fees compute to an annual percentage rate of 520% to 780%. The character of these transactions is that of a loan, with the lender’s fee representing consideration for the use of money over time.
It is also my understanding that many lenders have developed schemes intended to disguise the true character of the payday loan transaction. These schemes typically introduce a token consideration into the transaction in order to create the appearance that the lender’s fee is paid in return for the token consideration rather than for the use of money over time. Recent examples of transactions employing such token considerations include storage fees, Watson v. State, 235 Ga. App. 381 (1988); gift certificates or catalog coupons, Cashback Catalog Coupon Sales, Inc. v. Price, 102 F. Supp. 2d 1375 (S.D. Ga. 2000), Greenberg v. Commonwealth, 499 S.E.2d 266, 271 (Va. 1998); memberships or benefit clubs; discount coupons for title loans; or the purchase and leaseback of a consumer item owned by the borrower. The salient features of the “payday loan” transaction, however, remain the same: the lender advances money to the borrower, the borrower must repay the principal amount to the lender within a specified time period, the borrower’s check is held by the lender pending repayment, and the lender receives a fee in addition to the repayment of the principal.
The practice of making “payday loans” is not a new one. It is described in older cases as “wage buying” or “salary buying.” See, e.g., Gunnels v. Atlanta Bar Ass’n, 191 Ga. 366 (1940); Hinton v. Mack Publ’g Co., 41 Ga. App. 823 (1930); Public Fin. Corp. v. Londeree, 106 S.E.2d 760, 767 (Va. 1959). It is the use of personal checks as security for the loan that marks the modern variant of this old practice. Payday loans have been recognized by many courts, in Georgia and elsewhere, as a pretext for usury. Cashback Catalog Sales, Inc. v. Price, 102 F. Supp. 2d 1375 (S.D. Ga. 2000); Hamilton v. York, 987 F. Supp. 953 (E.D. Ky. 1997); Turner v. E-Z Check Cashing, 35 F. Supp. 2d 1042 (M.D. Tenn. 1999); Greenberg v. Commonwealth, 499 S.E.2d 266 (Va. 1998); White v. Check Holders, Inc., 996 S.W.2d 496 (Ky. 1999); Livingston v. Fast Cash USA, Inc., 753 N.E.2d 572 (Ind. 2001).
The Act was enacted in 1955 for the purpose of curbing abuse by unregulated entities engaged in the making of small loans. Marshall v. Fulton Nat’l Bank, 145 Ga. App. 190 (1978). The Act defines a “loan” as “any advance of money in an amount of $3000 or less under a contract requiring repayment and any and all renewals or refinancing thereof or any part thereof.” O.C.G.A. § 7-3-3(4). Unless exempted under O.C.G.A. § 7-3-6, no person is permitted to make a loan of $3000 or less without first obtaining a license from the Industrial Loan Commissioner. O.C.G.A. § 7-3-4.
An industrial lender may “charge, contract for, receive and collect interest at a rate not to exceed 10 percent per annum of the face amount of the contract.” O.C.G.A. § 7-3-14(1) (Supp. 2001). Loan fees and late charges are permitted but are strictly limited. O.C.G.A. § 7-3-14. No additional amounts may be charged, contracted for, or collected in connection with an industrial loan. O.C.G.A. § 7-3-15. See also Op. Att’y Gen. No. 2000-1 (Ind. 2000) (payday lender cannot avoid statutory fee limitations by referring to charges as “service fees”).
The facts of the typical “payday loan” transaction as described above clearly fall within the scope of the Act. By advancing an amount of money equal to or less than $3000 to the customer under an agreement that it be repaid, the merchant has made a “loan” within the definition set forth in O.C.G.A. § 7-3-3(4). Several courts have recognized that the act of advancing cash in return for the customer’s check, with an understanding that the check would not be negotiated for a specified period of time, is a “forbearance of money” and an extension of credit. Cashback Catalog Sales, Inc., 102 F. Supp. 2d 1375, 1379 (S.D. Ga. 2000); Turner v. E-Z Check Cashing, 35 F. Supp. 2d at 1047-48; Miller v. HLT Check Exchange, 215 B.R. 970, 974 (E.D. Ky. 1997) (“If this is not an extension of credit, this Court finds is hard to imagine any transaction that is.”); Op. Att’y Gen. No. 00-26 (Fla. 2000).1 Therefore, one who makes a “payday loan” in an amount of $3000 or less must conform to the requirements of the Act, including the requirement of a license from the Industrial Loan Commissioner, unless exempted under O.C.G.A. § 7-3-6. As to the second part of your question, I note that lenders have a long history of disguising usurious transactions for the purpose of avoiding the strictures of the law. The courts of this state have long shown a willingness to disregard the form of a usurious transaction in order to reveal its true character as a loan. As the Georgia Supreme Court has stated:
Whether a given transaction is a purchase . . . or a loan of money . . . depends, not upon the form of words used in contracting, but upon the real intent and understanding of the parties. No disguise of language can avail for covering up usury, or glossing over an usurious contract. The theory that a contract will be usurious or not according to the kind of paper-bag it is put up in, or according to the more or less ingenious phrases made use of in negotiating it, is altogether erroneous. The law intends that a search for usury shall penetrate to the substance.
Pope v. Marshall, 78 Ga. 635, 640 (1887); Tribble v. State, 89 Ga. App. 593, 596-97 (1954); Jackson v. Commercial Credit Corp, 90 Ga. App. 352, 355 (1954). The courts will “critically inspect and analyze” the substance of a transaction and in so doing “the name by which the transaction is denominated is altogether immaterial”. Tribble v. State, 89 Ga. App. at 596; Bank of Lumpkin v. Farmers State Bank, 161 Ga. 801 (1926). “[A]ny contrivance to evade the usury laws and enable the lender to get more than legal interest will render the transaction usurious, and the courts will look to the actual nature of the transaction and not to the form the parties have given it.” Williams v. Powell, 214 Ga. App. 216, 219 (1996); Young v. First Nat’l Bank, 22 Ga. App. 58, 65-66 (1918); Gunnels v. Atlanta Bar Ass’n, 191 Ga. at 381. “‘[I]t is the policy of the laws of this State to inhibit the taking of usury under every and any pretense or contrivance whatsoever. . . .’” West v. Dorsey, 248 Ga. 790, 792 (1982) (quoting McGehee v. Petree, 165 Ga. 492 (1927)); Troutman v. Barnett, 9 Ga. 30, 35 (1850).
Some of the guises commonly used by payday lenders to mask their transactions have been employed by usurers in other contexts, and have long since been discredited by the courts. “The practice of requiring a ‘tie-in’ sale of insurance or some other commodity which the borrower does not need or desire as a condition precedent to a loan has frequently been held usurious.” Tribble v. State, 89 Ga. App. at 597. Cases involving the alleged sale of “coupons” to disguise interest include Cash Service Co. v. Ward, 192 S.E. 344 (W.Va. 1937); Bushman v. Holmgram, 81 S.W.2d 177 (Tex. App. 1935); Glover v. Bushman, 104 S.W.2d 66 (Tex. App. 1937); and White v. Anderson, 147 S.W. 1122 (Mo. App. 1912). Cases involving the use of a sham “purchase and buyback” to disguise interest include Pope v. Marshall, 78 Ga. 635 (1887); Browner v. District of Columbia, 549 A.2d 1107 (D.C. App. 1988); Kuykendall v. Malernee, 516 P.2d 558 (Okla. App. 1973); Reitze v. Humphries, 125 P. 518 (Colo. 1912); Kjar v. Brimley, 497 P.2d 23, 25 (Utah 1972); and Bantuelle v. Williams, 667 S.W.2d 810 (Tex. App. 1983).
It is necessary to ascertain the true intent of the parties in each such transaction in order to determine if it is in fact a loan. The mere fact that the value of the token consideration and cash advanced by the merchant is equal to the price paid by the customer does not necessarily prove that the transaction was not a loan. Cashback Catalog Sales, Inc. v. Price, 102 F. Supp. 2d at 1379. If the substance of the transaction is the advance of money in return for a fee, then the transaction should be considered a loan and subject to the terms of the Act. It is my opinion that the transaction should be considered a loan if money is advanced pursuant to an agreement or understanding that it be repaid within a specified period of time, and the borrower’s intent in entering into the transaction is to obtain the use of money rather than to purchase the token consideration.
Therefore, it is my official opinion that a “payday loan” is within the definition of a “loan” for purposes of the Industrial Loan Act and that the maker of a “payday loan” remains subject to the Act notwithstanding the use of a guise or the issuance of a token consideration. Unless the lender is exempt under O.C.G.A. § 7-3-6, the making of payday loans as described above by an unlicensed lender is a violation of the Act.
Sidney R. Barrett, Jr.
Assistant Attorney General
1 The Board of Governors of the Federal Reserve System, in the official staff commentary to Regulation Z (“Truth in Lending”), specifically recognizes payday loans to be consumer credit transactions. 12 C.F.R. § 226.2(a)(14)(2) (Supp. I 2001).