After a federal court called part of a 1991 NC AG opinion 'incomprehensible' and let consumer finance licensees collect insurance commissions on loan-related sales, do consumer finance companies still have to apply for 'other business' authority from the Commissioner of Banks before selling unrelated products on the same premises?

Plain-English summary

NC Commissioner of Banks William T. Graham asked the AG to clarify what, if anything, a federal court decision had done to two earlier AG opinions on the Consumer Finance Act. The earlier opinions dated January 22, 1991 and January 15, 1993, had construed Article 15 of Chapter 53 (the Consumer Finance Act). The 1991 opinion addressed two issues: (1) whether the Commissioner of Banks had authority under G.S. 53-172 to permit Consumer Finance Act licensees to conduct other types of business on the same premises where they conducted consumer finance activities (the "other business" question), and (2) whether licensees could benefit directly or indirectly from charges or commissions on the sale of non-credit insurance, services, or products as part of a loan transaction, beyond the charges specified by G.S. 53-178. The AG said yes to the first and no to the second.

The 1993 opinion addressed a follow-up: could the Commissioner revoke "other business" authority for all licensees at once through a general order, or only one licensee at a time? The AG said only one at a time, because the statute envisioned individualized determinations.

Then the federal courts intervened. In Herndon v. ITT Consumer Financial Corp., 789 F. Supp. 720 (W.D.N.C. 1992), aff'd, 16 F.3d 409 (4th Cir. 1994) (unpublished), the Western District of NC called the 1991 AG opinion's conclusion on the second issue "incomprehensible" and dismissed the case with prejudice. The court concluded that charges and commissions collected by defendant licensees on sales made as part of a loan transaction did not violate the Consumer Finance Act, were not a per se violation of NC law for purposes of RICO or the Truth in Lending Act, when those sales were made under "other business" authority duly granted (though later withdrawn) by the Commissioner of Banks.

Commissioner Graham asked whether the federal decision changed the conclusion of the 1993 opinion that "other business" authority had to be applied for and granted on a case-by-case basis before a licensee could collect fees for engaging in another business activity.

Senior Deputy AG Ann Reed and Special Deputy AG Henry T. Rosser said no.

The AG read Herndon narrowly. The case dealt with what charges and commissions the licensees in that case were entitled to receive on sales they had made under "other business" authority. The court did not address, much less invalidate, the structural requirement that licensees obtain that authority in the first place. In fact, the federal court recognized that such sales could be made only if the licensees had been granted "other business" authority by the Commissioner pursuant to G.S. 53-172. Herndon, p. 723. The case may have implications for federal litigation about pre-1992-amendment fees and commissions, but it leaves untouched the upstream requirement that licensees must first apply for and receive "other business" authorization. The AG's 1993 opinion on that question still stood.

The opinion also gestured at the 1992 amendments to G.S. §§ 53-172 and 53-178, which changed some of the relevant statutory landscape, so the practical effect of Herndon in future federal cases would probably be limited to sales made before the 1992 amendments.

Currency note

This opinion was issued in 1994. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Article 15 of Chapter 53 has been amended multiple times since 1994. The "other business" authority framework remains a feature of NC consumer finance regulation, but specific limits on fees, products that can be sold under that authority, and disclosure requirements have shifted. Federal consumer-financial-services law has also evolved substantially since 1994, including the Dodd-Frank Act and CFPB-era amendments to the Truth in Lending Act. Anyone with a current question about consumer finance licensing or "other business" authority should consult current Chapter 53 Article 15, current NC Commissioner of Banks rulings, and current federal consumer-financial-services law.

Common questions

Q: What is "other business" authority under the Consumer Finance Act?
A: It is the Commissioner of Banks' statutory power under G.S. 53-172 to permit a consumer finance licensee to conduct other types of business (insurance sales, tax preparation, used auto sales, and similar) on the same premises where the licensee conducts its consumer finance lending activities. Without this authority, the licensee is limited to consumer finance lending on the premises.

Q: Why does the AG distinguish "the authority to engage in other business" from "what fees the licensee can charge on those other transactions"?
A: Because they are conceptually separate questions. The first is a licensing question: may a licensee even do this on the premises? The second is a fee question: assuming a licensee may do this, what can it charge? Herndon answered the fee question for a specific category of sales, but it did not displace the upstream licensing requirement. The opinion focuses on that distinction to limit Herndon's reach.

Q: How can a federal court call an AG opinion "incomprehensible"?
A: Federal courts can express strong disagreement with state agency interpretations, especially when those interpretations affect federal claims (RICO, TILA). The court's word choice was unusually pointed, but the legal effect is the same as any judicial rejection: the AG's interpretation is not binding on federal courts, and federal litigants can argue the AG was wrong. NC state agencies are not bound to follow a federal district court's view of NC law, however.

Q: What did the 1992 amendments to Sections 53-172 and 53-178 change?
A: The opinion does not detail the changes, just notes them. The amendments clarified rules about other-business sales and the scope of permitted charges. Modern practitioners with a fee question should look at the post-1992 text, not the pre-1992 framework the Herndon litigation arose under.

Q: If a licensee skips the "other business" application and just starts selling insurance, what happens?
A: The Commissioner can take action under the Consumer Finance Act, including license revocation. The 1994 opinion confirms that the application is a prerequisite, not a formality. Selling other products without authorization exposes the licensee to disciplinary action regardless of what Herndon said about the fees on sales made under authorized programs.

Q: How does this opinion relate to RICO claims against consumer finance lenders?
A: Herndon held that "other business" sales made under valid authority were not per se violations of NC law and therefore could not serve as RICO predicate acts. The AG's 1994 clarification does not disturb that holding; it just says the upstream NC licensing requirement still applies. A licensee that sold without authority would still face NC enforcement, and whether such unauthorized sales could support a RICO claim would be a separate question.

Background and statutory framework

Article 15 of Chapter 53 (Consumer Finance Act) regulates small-loan lenders. The structural choice the General Assembly made decades ago: consumer finance lenders must be licensed by the Commissioner of Banks, must follow specific rate caps, and need separate permission to do anything else on their premises. The "other business" authority requirement is what makes that separation enforceable.

The 1991 and 1993 AG opinions, and the resulting Herndon litigation, all turned on how integrated a licensee could become with affiliated insurance and product sales. The federal court's holding (sales made under granted authority were not violations of NC law) helped industry. The AG's 1994 reaffirmation (licensees still must apply first) helped regulators keep the application process intact.

The opinion is a clean example of the back-and-forth between state regulators, AG legal opinions, federal courts in private litigation, and the AG's response to federal court guidance. State agencies are not bound to follow federal district court interpretations of state law, but in practice the AG must explain to the Commissioner of Banks how the field has shifted and what is still on solid ground.

Citations

• N.C.G.S. § 53-172 (Consumer Finance Act; Commissioner of Banks authority to permit "other business" on licensee premises)
• N.C.G.S. § 53-178 (Consumer Finance Act; permitted charges and benefits to licensees on loan transactions)
• N.C.G.S. § 75-1.1 (NC Unfair and Deceptive Trade Practices Act, the state-law predicate at issue in Herndon's federal RICO and TILA discussion)
• Herndon v. ITT Consumer Financial Corp., 789 F. Supp. 720 (W.D.N.C. 1992), aff'd, 16 F.3d 409 (4th Cir. 1994) (unpublished) (federal Western District of NC; affirmed by Fourth Circuit in unpublished opinion; dismissed RICO and TILA claims based on sales made under granted "other business" authority)

Source

• Landing page: https://ncdoj.gov/opinions/consumer-finance-act-effect-of-federal-court-decisions-on-attorney-generals-opinions/

Original opinion text

May 3, 1994

Honorable William T. Graham
Commissioner of Banks
State Banking Commission
Dobbs Building
430 North Salisbury Street
Raleigh, North Carolina

Re: Advisory Opinion – Consumer Finance Act; Effect of Federal Court Decisions on Attorney General's Opinions

Dear Commissioner Graham:

This Office, pursuant to your requests, has furnished opinions dated 22 January 1991 and 15 January 1993 construing certain provisions of the Consumer Finance Act (Art. 15, G.S. Chap. 53). The 1991 opinion addressed two issues: (1) whether the Commissioner of Banks has the authority under G.S. § 53-172 to permit licensees under the Act to conduct other types of business on the same premises where they conduct their consumer finance activities ("other business" authority), and (2) whether licensees under the Act may benefit directly or indirectly from charges or commissions realized on the sale of non-credit insurance, services, or products as a part of the loan transaction under the Act, other than those charges specified by G.S. § 53-178. This Office answered the first issue in the affirmative and the second issue in the negative. In the 1993 opinion, this Office considered the issue of whether the Commissioner of Banks has the power under G.S. § 53-172 to issue an order of general applicability revoking other business authority of all licensees to whom he has previously granted such authority. This Office concluded that the Commissioner did not have such power but, rather, has the power to revoke the "other business" authority of individual licensees when he determines such authority to be contrary to the best interests of the borrowing public.

A decision of the United States District Court for the Western District of North Carolina, Herndon v. ITT Consumer Financial Corp., 789 F. Supp. 720 (W.D.N.C. 1992), subsequently affirmed in 16 F.3d 409 (4th Cir. 1994) (unpublished opinion), characterized as "incomprehensible" that part of the 1991 opinion which stated that, after having considered the provisions of G.S. § 53-178:

[I]t is our opinion that the statute prohibits licensees under the Consumer Finance Act from benefiting 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.

The Federal District Court, in dismissing the case with prejudice, concluded that charges and commissions collected by defendant licensees on sales made as a part of a loan transaction did not violate the Consumer Finance Act and were not a per se violation of North Carolina law for purposes of the Racketeer Influenced and Corrupt Organizations Act, G.S. § 75-1.1, or the Truth in Lending Act when the defendant licensees' sales were made under "other business" authority duly granted, though subsequently withdrawn, by the Commissioner of Banks.

You have now asked that we issue an opinion whether the holding of the federal court "changes in any way the conclusion of the Attorney General's Opinion of January 15, 1993 that 'other business' authority must be applied for and granted on a case-by-case basis before a licensee may collect fees for engaging in another business activity."

It is uncertain what effect, if any, the Herndon decision may have with regard to federal cases involving the North Carolina Consumer Finance Act brought in the courts of the Fourth Circuit, particularly when considered in light of the 1992 amendments to G.S. §§ 53-172 and 53-178. The holding of the case deals only with the issue of what charges and commissions the licensees in that case were entitled to receive on the sales that they made under "other business" authority. It is our view that the effect of Herndon, for purposes of federal litigation alone, will probably be limited to permitting licensees to receive fees and charges on all sales made prior to the 1992 amendment of G.S. § 53-178 under "other business" authority, whether or not the sales were made as a part of the loan transaction.

It is clear, however, that the federal court recognized that such sales could be made only if the licensees had been granted "other business" authority by the Commissioner of Banks pursuant to G.S. § 53-172. Herndon, page 723. It is our opinion, therefore, that the federal decision has no effect on the requirement that licensees who wish to engage in "other business" activities must first receive authorization so to do from the Commissioner pursuant to G.S. § 53-172; thus, the decision has no effect on our opinions or parts thereof dealing with the grant of "other business" authority by the Commissioner.

We hope that this fully answers your inquiry, but if you have other questions, please contact us.

Ann Reed
Senior Deputy Attorney General

Henry T. Rosser
Special Deputy Attorney General