Consumer Finance Act; Business Activities Allowable; Permissible Fees and Charges

January 22, 1991

Subject:

Consumer Finance Act; Business Activities Allowable; Permissible Fees and Charges; N.C.G.S. §§ 53-172 and 53-178

Requested By:

William T. Graham Commissioner of Banks Department of Economic and Community Development

Questions:

(1): Does the "other business" authorized by N.C.G.S. § 53-172 permit the Commissioner of Banks to allow a consumer finance licensee to engage in another business on the same premises as its consumer finance operations?
(2): May a licensee under the Consumer Finance Act benefit, either directly or indirectly, from charges or commissions realized on non-credit insurance, services, or products sold as a part of or in connection with a loan transaction under the Consumer Finance Act other than those charges and commissions specified by N.C.G.S. § 53-178?

Conclusions:

(1): Yes.
(2): No.

The Consumer Finance Act (Art. 15, G.S. Chap. 53) was originally enacted as Chapter 1053, Session Laws of 1961, which became effective 60 days after its ratification on June 19, 1961. The language of N.C.G.S. § 53-172, as originally enacted, was as follows:

Conduct of other business in same office. No licensee subject to the provisions of this Article shall conduct its business as a licensee in an office, or annex to an office, or [sic] any other business, but shall maintain an office in which only its business as a licensee shall be conducted. Installment paper dealers as defined in G.S. 105-83 shall not be considered as being any other business within the meaning of this Section. The books, records and accounts relating to loans shall be kept in such manner as the Commissioner prescribes so as to delineate clearly the loan business from any installment dealer paper transactions.

In addition, Section 53-184 provided:

(c) If a licensee conducts another business or is affiliated with other licensees under this Article, or if any other situation exists under which allocations of expense are necessary, the licensee or licensees shall make such allocation according to appropriate and reasonable accounting principles.

N.C.G.S. § 53-172 was amended by Chapter 1212, Session Laws of 1971, to read as follows: Conduct of other business in same office. No licensee shall conduct the business of making loans under this Article within any office, suite, room, or place of business in which any other business is solicited or engaged in unless, in the opinion of the Commissioner, such other business would not be contrary to the best interests of the borrowing public and is authorized by the Commissioner in writing.

If the conduct of any other business authorized by the Commissioner should, in the opinion of the Commissioner, prove contrary to the best interests of the borrowing public, the authority granted to conduct such business shall be withdrawn in writing by the Commissioner.

Installment paper dealers as defined in G.S. 105-83, and the collection by a licensee of loans legally made in North Carolina, or another state by another government regulated lender or lending agency, shall not be considered as being any other business within the meaning of this section. This section shall not be construed as authorizing the collection of any loans or charges in violation of the prohibitions contained in G.S. 53-190. The books, records, and accounts relating to loans shall be kept in such manner as the Commissioner of Banks prescribes as to delineate clearly the loan business from any other business authorized by the Commissioner.

This is also the language of current N.C.G.S. § 53-172.

The question has now arisen whether N.C.G.S. § 53-172, as amended, empowers the Commissioner of Banks to permit a licensee under the Consumer Finance Act to engage in other business on the same business premises or whether the Commissioner’s authority under the statute is limited to allowing only non-related business entities to share a licensee’s business premises.

This is a matter of first impression. No cases have been found which construe this statute. The office of the Commissioner of Banks has advised, however, that every Commissioner who has served since enactment of the 1971 amendment has interpreted the language of the statute as authorizing the Commissioner to allow licensees to conduct other business on the same premises as their consumer finance operations. As a result, consumer finance companies throughout the State have been and are conducting various business operations in conjunction with their consumer finance business.

The language of the present Act, and particularly N.C.G.S. § 53-172, supports that interpretation. As quoted above, N.C.G.S. § 53-184(c) of the original act contemplated that licensees would be engaged in other businesses, but G.S. § 53-172 prohibited the conduct of such businesses on the same premises as consumer finance operations. The 1971 amendment to N.C.G.S. § 53-172 falls into three distinct parts. The first paragraph of the statute simply authorizes the Commissioner, upon making the appropriate public interest determination, to allow other business to be conducted on the same business premises as consumer finance operations. This permission could apply to non-related business entities as well as other business of the licensee. The second paragraph, however, referring specifically to "the conduct of any other business authorized by the Commissioner," appears to contemplate not just permission for related or non-related business entities to share the same premises, but rather a specific authorization by the Commissioner to engage in a particular business. Since the Commissioner’s regulatory authority under the Consumer Finance Act extends only to small loan licensees, it is logical to conclude that this authorization to engage in other business applies to licensees under the Act. In other words, since the Commissioner has no authority under the Act to regulate the business activities of entities other than consumer finance licensees, the authority granted by the second paragraph of N.C.G.S. § 53-172 must apply to such licensees.

This view is supported by the language of the third paragraph of N.C.G.S. § 53-172. The last sentence of section 53-172 of the 1961 Act recognized that installment paper dealer transactions of a licensee, although permitted on the same premises as its consumer finance activities, were, for bookkeeping and accounting purposes, "other business" of the licensee. The 1971 amendment did not retain this language. The last sentence of the third paragraph of the current statute requires that "books, records, and accounts relating to loans shall be kept in such manner . . . as to delineate clearly the loan business from any other business authorized by the Commissioner." (Emphasis added.)

This language is significant in several respects. First, as previously noted, the Commissioner’s authority under the Act extends only to consumer finance licensees. Next, it is extremely unlikely that a consumer finance licensee would be maintaining, for its loan transactions, a financial record keeping system which it shared with some non-related business entity. Such joint financial records would be contrary to good business practice. Finally, the principle of the present Act is consistent with that of the 1961 Act – maintaining separate sets of books for the "other business" transactions of the licensee.

Other provisions of the present Act lend credence to this view. The language of N.C.G.S. § 53184(c), relating to "another business" of the licensee, which appeared in the 1961 Act and is quoted above, has been retained, while N.C.G.S. § 53-189(b) tacitly recognizes that licensees may engage in writing credit life, accident and health, and property insurance in connection with loans made by the licensees.

Finally, successive Commissioners over the last nineteen years have uniformly interpreted

N.C.G.S. § 53-172 as authorizing them to permit licensees to conduct other business on the same premises as their consumer finance operations. Although the Consumer Finance Act has been amended several times during that period (e.g., Ch. 464, S.L. 1981; Ch. 154, S.L. 1985; Ch. 444,

S.L. 1987; Ch. 17, S.L. 1989), N.C.G.S. § 53-172 has not been amended to prohibit licensees from conducting other business on the same premises as their consumer finance operations. Where an issue of statutory interpretation arises, the construction adopted by those who execute and administer the statute in question is highly relevant as evidence of what it means. State v. Tew, 326 N.C. 732, 739, 392 S.E.2d 603 (1990); Walls & Marshall Fuel Co. v. N.C. Dept. of Revenue, 95 N.C. App. 151, 155-56, 381 S.E.2d 815 (1989). And an administrative interpretation of a statute which has continued over a long period of time with the silent acquiescence of the legislature should be given consideration in the construction of the statute. Yacht Co. v. High Commissioner of Revenue, 265 N.C. 653, 658, 144 S.E.2d 821 (1965); Hedrick v. Graham, 245 N.C. 249, 261, 96 S.E.2d 129 (1957).

We conclude from the foregoing, and in the absence of controlling authority to the contrary, that the Commissioner of Banks is authorized by N.C.G.S. § 53-172 to allow licensees under the Consumer Finance Act to conduct other business on the same premises as their consumer finance operations.

The office of the Commissioner of Banks has advised that regulators of small loan licensees in other states have found situations in which the licensees or affiliates, subsidiaries, or parent corporations of corporate licensees have sold to borrowers, as a part of or in connection with the loan transaction, non-credit insurance or other non-credit products or services, such as memberships in motor clubs or thrift clubs. The Commissioner has requested an opinion of the Attorney General whether the provisions of N.C.G.S. § 53-178 would prohibit a licensee under the Consumer Finance Act from realizing a benefit from charges and commissions on such sales, either directly when the sales are made by the licensee, or indirectly when the sales are made by an affiliate, associate, subsidiary, or parent of the licensee.

The pertinent provisions of N.C.G.S. § 53-178 are as follows:

No further or other charges or insurance commissions shall be directly or indirectly contracted for or received by any licensee except those specifically authorized by this Article. No licensee shall divide into separate parts any contract made for the purpose of or with the effect of obtaining charges in excess of those authorized by this Article.

Again, the issue raised here is a matter of first impression in this State. There are no North Carolina appellate decisions construing N.C.G.S. § 53-178, and no cases which are directly in point have been found from other jurisdictions. In general, however, since small loan acts are remedial in nature, they are given a liberal interpretation in order to afford borrowers the greatest practicable measure of protection. Legislatures require, as a concomitant of permitting interest charges substantially in excess of the commercial rate, that small loan companies, in making loans, deal fairly with borrowers and adhere scrupulously to the terms of the statute. 54 Am. Jur. 2d, Moneylenders and Pawnbrokers, § 13. It is the legislaltive intent to void any loan contract which violates restrictive provisions relating to charges in addition to interest, and such provisions are given effect no matter how the excessive charges are disguised. 54 Am. Jur. 2d, Moneylenders and Pawnbrokers, § 23.

The literal language of N.C.G.S. § 53-178 prohibits licensees from receiving any charges or commissions whatsoever other than those specified in Article 15 of Chapter 53. This could be read to prohibit licensees from making or receiving any charges or commissions except in connection with the operation of their small loan business. We feel that this construction is too restrictive, however. Having previously concluded that licensees may engage in other business activities if allowed to do so by the Commissioner of Banks, we are of the opinion that the statute prohibits licensees from making or receiving any charges or commissions, directly or indirectly, other than those specified in Article 15 as a part of or in connection with any loan transaction under the Consumer Finance Act.

The charges and commissions authorized by the Consumer Finance Act are: interest, N.C.G.S. §§ 53-173, 53-176; fee for returned checks, N.C.G.S. § 53-175; recording fees, N.C.G.S. § 53-177; and commissions on credit life, credit accident and health, and credit property insurance when written under the provisions of Article 57, G.S. Chap. 58, by or through the lender or its affiliate, associate, or subsidiary, N.C.G.S. § 53-189. No other charges or commissions may be contracted for or received, either directly or indirectly, by a licensee as a part of or in connection with a loan transaction within the Consumer Finance Act.

Each of the charges and commissions authorized by the Consumer Finance Act are directly related to and in furtherance of the loan transaction. The fee for returned checks reimburses a licensee its expenses in the event a borrower writes a bad check, and the recording fee defrays the cost of protecting the licensee’s security interest in collateral given in connection with the loan. The credit life and credit health and accident insurance protect both the licensee and the borrower should the borrower die or suffer illness and injury which would make it difficult or impossible for the borrower to repay the loan. The credit property insurance protects the licensee if the collateral given to secure the loan is damaged, lost, or destroyed. There is, then, a clear-cut, rational basis for each charge and commission authorized by the Act.

The Minnesota Supreme Court decided a case in 1989 which, though not directly in point, is informative. In Hawkins v. Thorp Credit and Thrift Company, 441 N.W. 2d 470 (Minn. 1989), the Court was called upon to decide whether small loan companies could sell noncredit life insurance in connection with loans. The case arose upon a complaint alleging that the defendant engaged in deceptive sales techniques that caused the plaintiff to purchase noncredit life insurance and membership in a thrift club as a part of a loan transaction. Subsequent to the filing of the action, an investigation by the Minnesota Attorney General’s Office resulted in allegations that the defendant engaged in "insurance packing", i.e., the sale of noncredit life insurance and thrift club memberships by including them in loan transactions without the express consent or awareness of the customer, suggesting that refusal to buy the products would delay the loan, and failing to disclose orally that the purchase of these products was optional. Although the defendant did not admit the allegations, it entered into an assurance and order to make refunds and to implement safeguards to prevent customer misunderstanding.

The trial court granted the defendant’s motion for summary judgment, holding that, absent evidence of "insurance packing," the sale of noncredit life insurance and thrift club memberships was not a per se violation of Minnesota law. The Supreme Court reversed, holding that state statute prohibited the defendant from selling such insurance, and remanded with regard to the thrift club membership for findings whether such sales violated state law in any way. The statute which the court found prohibited the sale of noncredit life read, in pertinent part:

No licensee shall, directly or indirectly, sell or offer for sale any insurance in connection with any loan made under this chapter except as and to the extent authorized by this section. The sale of credit life and credit accident and health insurance is subject to the provisions of [Minnesota statutes regulating the sale of credit life, accident and health insurance] . . . .

The Supreme Court construed the statute to permit small loan companies to sell only credit life, accident, or disability insurance in connection with a loan.

While the language of the Minnesota statute differs from that of N.C.G.S. § 53-178, we construe the effect of the two statutes to be the same. The Minnesota statute forbids the sale by a small loan company of any insurance other than that authorized by the statute, that is, credit life, accident, and health insurance. N.C.G.S. § 53-178 takes a different approach, providing that the licensee may not contract for or receive, directly or indirectly, any charges or insurance commissions other than those authorized by Article 15. The only insurance commissions authorized are those for the sale of credit life, accident and health, and property insurance.

N.C.G.S. § 53-189. Thus, unless a North Carolina lender is willing to forego the receipt, directly or indirectly, of insurance commissions on other types of insurance, the effects of the Minnesota statute and of N.C.G.S. § 53-178 are identical.

The Iowa Attorney General’s Office was called upon in 1965 by the Iowa Department of Insurance to construe a statute similar to the Minnesota statute. The Iowa statute read:

No licensee shall, directly or indirectly, sell or offer for sale any insurance in connection with any loan made under this chapter except as and to the extent authorized by this section. Life, accident and health insurance, or any of them, may be written . . . upon or in connection with any loan . . . .

After review of the Iowa law, the Attorney General’s opinion concluded:

Therefore, our answer to your first question is that licensees . . . are only authorized to write credit life insurance and credit accident and health insurance.

The North Carolina Department of Insurance, in its Legal Directive Number 90-3, dated April 27, 1990, ruled:

(3) Consumer Finance Act: G.S. 53-189 authorizes the writing of credit life insurance, credit accident and health insurance, credit property insurance as defined in G.S. 58-57-90, and automobile physical damage insurance as defined in G.S. 58-57-100 in connection with loans governed by the Consumer Finance Act. No other kind of insurance may be sold.

The Department of Insurance issued Legal Directive Number 90-3A on May 3, 1990, amending paragraph 3 of Directive Number 90-3 to read as follows:

By letter dated December 6, 1990, Mr. Roger Langley, Senior Deputy Commissioner of the Department of Insurance, provided the following clarification of Directive No. 90-3A:

It is the Department’s opinion that the provisions of Article 15 of Chapter 53 of the General Statutes of North Carolina (North Carolina Consumer Finance Act) relating to kinds of insurance authorized to be sold in connection with loans governed by that law are authoritative; that is, only those powers specifically enumerated therein are held by those entities. North Carolina G.S. 53189 sets forth that credit life insurance, credit accident and health insurance, credit property insurance, and automobile physical damage insurance, as defined and restricted in G.S. 58-57100, are the only kinds of insurance that are authorized and permitted to be sold by any lender governed by Article 15 of Chapter 53.

Our modification of Legal Directive 90-3 was not intended to indicate that our Department felt that any other kinds of insurance were authorized to be sold in connection with loans governed by the North Carolina Consumer Finance Act. We interpret the phrase "in connection with" rather broadly and are of the opinion that it would include any insurance that is purchased and financed with the loan obligation regardless of whether or not such insurance is tied in directly to the loan. We are also of the opinion that any sale of insurance must be made by a properly licensed agent.

We have carefully read N.C.G.S. § 53-178. Construing its restrictive provisions as a remedial act designed to protect borrowers and in the light of the authorities cited and quoted above, it is our opinion that the statute prohibits licensees under the Consumer Finance Act from benefitting from any charges or insurance commissions realized from the sale of any services, products, or insurance made as a part of or in connection with a loan transaction under the Act other than those specified in the Act, whether benefit is realized either directly by the licensee, or indirectly by any affiliate or associate of the licensee, or, in the case of corporate licensees, by any subsidiary or parent of the licensee.

Lacy H. Thornburg Attorney General

Henry T. Rosser Special Deputy Attorney General