Last week, in Western Sky Financial v. State of Georgia, the Georgia Supreme Court issued a decision rejecting challenges to the state's Payday Lending Act (the "Act") and affirming the denial of a motion to dismiss claims alleging violations. The decision confers sweeping authority on the state's Attorney General to regulate out‑of‑state lenders who extend small, high-interest-rate loans to Georgia residents.
Georgia's Payday Lending Act imposes civil and criminal liability on lenders extending loans in the amounts of $3,000 or less, unless the loans are permissible under applicable state usury law or subject to certain exemptions. The defendants in the case – including CashCall, Inc. and Western Sky Financial, LLC, two frequent litigants in recent cases involving lending regulation – operated an out‑of‑state lending model extending loans to Georgia residents that ran afoul of the Payday Lending Act's restrictions. The Georgia Attorney General filed a complaint against the defendants, who moved to dismiss. The trial court denied the motion to dismiss, and the defendants appealed to the Georgia Supreme Court.
The Georgia Supreme Court affirmed, rejecting each of the defendants' challenges to the Act. The Court found that statutory language stating that "Payday lending ... does not encompass loans that involve interstate commerce" was not meant to limit the Act's reach to only loans having no connection with interstate commerce. Because virtually all modern financial transactions involve internet-based systems, the Court reasoned, a construction limiting the Act to purely in‑state loans would mean that it "effectively prohibit[s] nothing at all." The Court also rejected the defendants' arguments that Georgia law was inapplicable because "the last act essential to the completion" of the loan agreements took place in another state and because of a choice-of-law provision in the loan agreements. It explained that parties cannot contract around a state's "police power to enforce the criminal laws." Finally, the Court held that Western Sky – a tribal lender – could not rely on tribal sovereign immunity to avoid liability for "off-reservation activities" like lending in Georgia.
Although Georgia's Payday Lending Act applies only to a certain class of loans, several of its provisions are noteworthy.
- First, although it exempts national banks and FDIC-insured, state-chartered banks from its scope, the Act contains no exemptions for third-party assignees of such exempt parties. It is thus unclear whether a Georgia court would recognize federal preemption as applicable to third‑party non‑bank entities.
- Second, the Act applies to "[a]ny arrangement by which a de facto lender purports to act as the agent for an exempt entity." To determine whether a party is a "de facto lender" for purposes of this provision, the Act explicitly adopts the broad "predominant economic interest" standard that some courts have applied in approaching so-called "true lender" questions under other states' law.
- Third, the Act expressly forbids the use of choice-of-law provisions purporting to select another state's law as applicable to a loan.
The Georgia Supreme Court's decision in Western Sky reinforces the scope of the Act. We will continue to monitor developments in both state and federal courts confronting legal issues that affect the marketplace lending industry.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.