Ramsey County, MNAn Internet payday lender that attempted to duck behind the protective shield of the Dormant Commerce Clause of the US Constitution, will have that cloak yanked away following a decision by the Court of Appeals.
Internet payday lending has exploded in both popularity and prevalence in recent years, in spite of predatory interest rates and a lack of regulation. Individual states have been working to shut such lenders down, or at the very least prevent them from issuing loans to the constituents from out of state, without benefit of licensing or regulations on things such as state-mandated caps on interest rates.
Among the states chasing down Internet lenders is Minnesota, which launched lawsuits against five vendors in 2011, winning its case against Integrity Advance, an online payday lender. Integrity, which is accused of charging exorbitant interest rates higher than 1,000 percent in some cases, fought back by claiming the state of Minnesota was violating the Dormant Commerce and Due Process clauses of the US Constitution.
According to The Minnesota Lawyer (4/4/14), the US District Court denied the counterclaim motion and the Court of Appeals turned down a petition for discretionary review.
To that end, the Court found that the Dormant Commerce Clause, while prohibiting statutes that discriminate against interstate commerce, does not preclude regulation of an online lender who extends loans to people living in Minnesota. Such commerce is not wholly outside the state, according to the Court.
The primary thrust of Minnesota’s case was an alleged violation of Minnesota Statute sections 47.60 and 47.601. The Internet payday lender was hit with $7 million in statutory penalties and a restitution bill for $705,308 together with costs and attorney’s fees.
It should be noted that the opinion written by Court of Appeals Judge Roger Klaphake was described as “sternly worded.”
It was found that Integrity had 28,000 contacts for Minnesota residents in its system, logging 20,000 transactions withdrawing money from bank accounts with addresses in Minnesota. Thus, the reality of making loans to and collecting from Minnesotans was never in doubt.
According to court records, Integrity charged $30 every two weeks per $100 borrowed, for loans up to $500. It stepped up the charges periodically under the auto renewal payment plan. “The effect of these loan renewals was that borrowers paid more than $1,400 in interest on a $500 loan and more than $2,000 in interest on a $700 loan,” the Court said.
Judge Klaphake noted in his final opinion that the award against the defendant was only 21 percent of what was within the discretion of the Court to award.
Payday lending is an age-old service of value to blue-collar workers and others who may not have a relationship with a traditional bank and in need of assistance between paychecks. Such lenders, traditionally storefront operations that are regulated and licensed by the state, provide temporary, short-term loans at rates that are usually higher than those charged by a bank or credit union. That’s the expectation and protocol for such lenders. However, caps mandated by the state shield consumers from being charged interest rates higher than appropriate for that type of loan.
The Internet payday lender observes no such regulation, and the industry is known for various behavioral sins - from withdrawing funds from a client’s bank account(s) without authorization or beyond the agreed parameters to charging predatory interest rates.
In the case of Integrity, Court found that the defendant failed to act in good faith, injured the public in a significant manner, and collected “shockingly” usurious sums of money from “some of the State’s most financially vulnerable citizens”; and did not deserve to benefit from its “ill-gotten gains,” according to the Court.
The state charged that Integrity’s Minnesota-based clients were made to pay interest rates as high as 1,369 percent. The Internet payday loan provider was also accused of automatically “rolling over” existing loans for extended periods, failing to have the required state license and otherwise violating state law in Minnesota.
The lawsuit is State of Minnesota et al v. Integrity Advance LLC, case No. 62-cv-11-7168, filed May 31, 2013 in the Second Judicial District Court, Ramsey County, Minnesota.
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