Magazine article American Banker

Lawsuit Greets Payday Lender's Pa. Workaround

Magazine article American Banker

Lawsuit Greets Payday Lender's Pa. Workaround

Article excerpt

Three months ago, after its bank partner quit the payday lending business under regulatory pressure, Advance America Cash Advance Centers Inc. introduced an open-ended line of credit so it could keep doing business in Pennsylvania.

Now the state is attacking the line of credit itself.

Gov. Edward G. Rendell, through the state's Department of Banking, filed a lawsuit against Advance America on Wednesday in a state court in Philadelphia, saying the line violates Pennsylvania's 6% usury cap for unlicensed lenders.

Jamie Fulmer, a spokesman for the Spartanburg, S.C., company, said the department has made its position clear "in public comments and in formal discussions with us" ever since the line was introduced. "However, we continue to remain confident that we are in compliance with all applicable laws and we are going to vigorously defend our position."

The line of credit is for up to $500, and according to the suit, Advance America, which is not licensed by the department, charges interest on advances at an annual percentage rate of 5.98%. However, the company also charges a $149.95 monthly participation fee, which would drive the APR well over the cap set by the state's Loan Interest and Protection Law of 1974.

The suit calls the participation fee "a sham, the true nature of which is illegal, usurious interest in violation of the maximum allowable annual interest rate."

Asked about Pennsylvania's contention that Advance America is not licensed, Mr. Fulmer said it is licensed under Delaware law.

Daniel T. Fannon, an analyst with Jefferies & Co. in San Francisco, said in an interview that he considers the suit "a negative" for the lender.

"This being an election year, it will make it harder for Advance America to prevail because of the negative consumer sentiment associated with this product. …

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