News: CJ Exclusives

Lender’s ISP Masquerade Illegal

Court rules payday lender disguised self as internet service provider

The N.C. Court of Appeals has upheld a lower-court ruling that a payday lender’s attempt to pass itself off as an Internet service provider is a violation of the state’s usury and banking laws.

North Carolina briefly legalized payday lending, a form of short-term borrowing at high interest rates. When the provision allowing the practice expired Aug. 31, 2001, all payday lenders in the state didn’t close, however. Some were tied to federally chartered banks and exempt from the state’s action. Advance Till Payday tried a different tactic to stay in business, becoming Advance Internet and offering what appeared to be payday loans as before linked with an Internet service-provider provision.

As Advance Till Payday, the company legally lent relatively small amounts of money at high interest rates. Customers would write checks postdated by two weeks or when they were next paid. Advance Till Payday would then give 85 percent of the amount of the checks in cash and retain the remaining 15 percent when the check was cashed. If a customer couldn’t cover his check to Advance Till Payday when it was due to be deposited, he could extend the loan by two weeks by paying the company an additional 15 percent of the check’s face value. This process would continue for up to a year until the customer had enough money to cover the original check to Advance Till Payday.

After the state again outlawed payday lending, Advance Till Payday became Advance Internet. The company claimed to be an “Internet service provider” that would provide access to the Internet on its computers and use of office equipment, such as faxes and copiers, by appointment at its locations. A customer who signed up for the Internet service got a “cash rebate” against which he would have to pay periodic fees for “Internet access.” As a practical matter, there was no change in lending practices despite the name change except that the company’s share increased from 15 percent to 20 percent while customers had some right to use the company’s office equipment.

To the N.C. Attorney General’s office, Advance Till Payday/Advance Internet’s rebranding was nothing more than an attempt to evade state usury and banking laws. It sued to shut down the company’s operations in the state. The company, however, contended that because the Internet-usage provision was a valuable service, it was doing more than merely lending money and exempt from the usury laws.

In a decision Nov. 1, the N.C. Court of Appeals sided with a lower court in finding that Advance Internet was a payday lender and not an Internet service provider.

“We conclude that, notwithstanding the facial resemblance to Internet service contracts, it is transparently obvious that defendants are offering loans, not bona fide Internet service contracts,” Judge Eric Levinson wrote for the court.

“Further, the dollar amount of the periodic payments, when calculated as interest, reveals that the annual rate of interest on these loans is greatly in excess of the maximum permitted under North Carolina law. Such transactions meet the definition of loans offered at usurious interest rates,” Levinson wrote.

State law sets the maximum legal interest rate at 16 percent per year. Advance Internet was charging rates of more than 400 percent per year.

The court expressly rejected the company’s claim that it was really selling Internet services.

“Defendants contend that their charges for Internet access are substantially similar to those of other private entities where individuals pay for hourly computer access. However, at such establishments, customers receive the benefit of the contracted-for product, per-hour computer access. As regards Advance Internet contracts, the substance of the ‘product’ is the ‘cash rebate’. And customers who want hourly computer access at other private entities are not required to execute a one-year contract requiring repeated payments on a ‘rebate’…

“Defendants also characterize the monies received by its customers as ‘cash rebates.’ Black’s Law Dictionary defines ‘rebate’ as ‘[a] return of part of a payment, serving as a discount or reduction.’ However, the monies provided to defendants’ consumers do not represent a ‘return’ or a ‘discount’ or a ‘reduction’ of anything. Instead, the ‘cash rebates’ stand alone, and are not related or associated with any ‘payment’ for something of real value.”

The court also noted that the company was advertising in the Yellow Pages under “loans” and that it did not keep logs on customer use of its office equipment and computers until May 2003, nearly two years after supposedly being in the businesses of providing internet and office equipment access.

The case is State ex rel. Cooper v. N.C.C.S. Loans, Inc., (04-1660). http://www.aoc.state.nc.us/www/public/coa/opinions/2005/041660-1.htm