Bankwest, Inc. v. Baker
2004 U.S. Dist. LEXIS 11325, 2004 WL 1349896, 324 F.Supp.2d 1333 (2004)
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Rule of Law:
A state statute targeting predatory lending practices by non-bank agents of out-of-state banks is not preempted by federal banking laws or the Federal Arbitration Act, does not violate the Commerce Clause, and is not unconstitutionally vague or an ex post facto law, provided the statute focuses liability on agents with a "predominant economic interest" in loan revenues and applies clear standards.
Facts:
- Plaintiffs consist of state-chartered banks located in South Dakota and Delaware (the Banks) and their non-bank agents (the Agents) operating in Georgia.
- The Banks, lacking a physical presence in Georgia, make small, short-term "payday loans" to Georgia borrowers for amounts up to $500, with terms of four to forty-five days, carrying annual percentage rates (APRs) between 443% and 520%.
- The Banks entered into agreements with the Agents to market, service, and collect payments on these payday loans in Georgia; the Agents obtain applications, transmit them for bank approval, secure signed loan agreements, issue loan funding checks drawn on Bank accounts, and deposit payments into Bank accounts.
- As compensation, the Agents receive a fee calculated from loan revenues; for BankWest and Advance America, this fee is $13.80 for every $100 loaned, equating to 81% of the loan revenues, with other agents alleging a "predominant share of Loan revenues."
- Georgia enacted Act No. 440 (S.B. 157), a new payday lending law to be effective May 1, 2004, broadly defining and reiterating the illegality of payday lending, strengthening penalties, and amending Georgia's RICO Act.
- The Act includes an exemption for out-of-state, FDIC-insured banks from its general prohibition on payday lending, but this exemption is subject to "de facto lender" provisions.
- Under the Act, a purported agent is considered a "de facto lender" if "the entire circumstances of the transaction show that the purported agent holds, acquires, or maintains a predominant economic interest in the revenues generated by the loan," making such agents subject to the Act's prohibitions and penalties.
- The Act also stipulates that an arbitration clause in a payday loan contract is unenforceable if the contract is unconscionable, requiring courts to consider factors such as whether the contract restricts the right to participate in a class action.
Procedural Posture:
- Plaintiffs (state-chartered banks and their non-bank agents) filed motions for a preliminary injunction in federal district court, seeking to enjoin enforcement of Georgia's new payday lending law (Act No. 440, S.B. 157) on the grounds that it is unconstitutional.
- The District Court consolidated four related cases, designating BankWest, et al. v. Baker, et al. as the lead case.
- On April 30, 2004, the District Court entered a temporary restraining order (TRO) restraining enforcement of the Act against plaintiffs until May 15, 2004, to provide time for the Court to consider the voluminous filings submitted by the parties.
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Issue:
Does Georgia's payday lending law, which prohibits non-bank agents with a "predominant economic interest" in loan revenues from making high-interest payday loans on behalf of out-of-state banks, violate the Federal Deposit Insurance Act's preemption, the Commerce Clause, the Federal Arbitration Act, or due process through vagueness, or constitute an unconstitutional ex post facto law or impairment of contracts?
Opinions:
Majority - Shoob, Senior District Judge
No, Georgia's payday lending law is constitutional and not preempted by federal law because it specifically targets non-bank entities that, despite acting as agents for out-of-state banks, hold a predominant economic interest in the high-interest loan revenues, thus preventing the circumvention of Georgia's usury laws. The court found no Federal Deposit Insurance Act (FDIA) preemption because Section 27(a) allows state banks to "export" home state interest rates, but Georgia's Act provides a complete exemption for out-of-state, FDIC-insured banks. The Act's "de facto lender" provisions apply liability only to the agent, not the bank, if the agent holds a "predominant economic interest" in loan revenues, an approach supported by federal banking regulators' efforts to curb "charter renting" schemes. The court distinguished Marquette and Krispin as involving wholly-owned subsidiaries, not independent third-party agents, and rejected Hudson for prioritizing form over substance. Regarding the Commerce Clause, the court concluded the Act does not discriminate against interstate commerce. It does not entirely prohibit agents but rather imposes liability only on agents receiving a "predominant economic interest" in loan revenues, and it places fewer restrictions on out-of-state banks than on Georgia-based lenders by virtue of the banks' direct exemption. The court found no Federal Arbitration Act (FAA) preemption, stating that the Act's provision on arbitration clauses merely aligns with generally applicable Georgia contract defenses of unconscionability, which may consider limitations of remedies, including class action waivers, as one factor among the "totality of the circumstances." This does not single out arbitration clauses for disfavored treatment. Furthermore, the FAA does not grant immunity to arbiters or arbitration companies assisting in violations of otherwise valid state laws. On vagueness, the court determined that the "de facto lender" provisions are not unconstitutionally vague. Interpreting "predominant economic interest" in light of the legislative intent (referring to "majority of the revenues"), the court found the term clear, especially given that plaintiff Agents received 81% of loan revenues. The instruction to consider "the entire circumstances" merely mandates a substance-over-form analysis consistent with Georgia's usury jurisprudence. Finally, the court held that the Act is not an unconstitutional ex post facto law or an impairment of contracts because it applies prospectively only, in accordance with Georgia's statutory construction rules. It does not criminalize past, legally made loans, nor does it prevent banks from using compliant agents to collect pre-effective date loans. The Act only prevents the future formation of illegal contracts by de facto lenders. Considering the plaintiffs' low likelihood of success on the merits, alongside the balance of harms (the injury to thousands of Georgia citizens from high-interest loans outweighs the plaintiffs' unrecoverable revenue losses) and the public interest (deference to the legislature's determination that payday lending has adverse effects), the court denied the motions for a preliminary injunction.
Analysis:
This case significantly upholds states' power to regulate predatory lending practices, particularly "rent-a-charter" schemes where non-bank entities use out-of-state banks to circumvent local usury laws. It clarifies that federal banking laws, while allowing interest rate exportation for banks, do not necessarily shield third-party agents from state regulation if those agents hold the "predominant economic interest" in the loans. The ruling also reinforces the principle that generally applicable contract defenses, even when applied to specific contractual terms like class action waivers within arbitration clauses, do not necessarily run afoul of the Federal Arbitration Act unless they single out arbitration agreements for disfavored treatment.
