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Thursday, January 28, 2010

Ind. Decisions - 7th Circuit decides Indiana Uniform Consumer Credit Code case

In Midwest Title Loans v. David H. Mills, Dir, Ind. Dept. Financial Institutions (SD Ind., Judge Barker), a 19-page opinion, Judge Posner writes [emphasis added by ILB]:

An Illinois loan company, Midwest Title Loans, Inc., sued under 42 U.S.C. § 1983 to enjoin, as a violation of the commerce clause, the application to Midwest of Indiana’s version of the Uniform Consumer Credit Code (a model code, provisions of which have been adopted in several states). Ind. Code §§ 24-4.5-1-101 et seq. The district court entered a permanent injunction, and the state appeals.

A provision added to the Indiana version of the model code in 2007 and aptly termed the “territorial application” provision states that a loan is deemed to occur in Indiana if a resident of the state “enters into a consumer sale, lease or loan transaction with a creditor . . . in another state and the creditor . . . has advertised or solicited sales, leases, or loans in Indiana by any means, including by mail, brochure, telephone, print, radio, television, the Internet, or electronic means.” § 24-4.5-1-201(1)(d). If the territorial-application provision is triggered, the lender becomes subject to the code and must therefore get a license from the state to make consumer loans and is bound by a variety of restrictions that include a ceiling on the annual interest rate that a lender may charge. * * *

Midwest Title is what is known as a “[car] title lender.” “Cash loans, variously called car title pawn, car title loans, title pledge loans, or motor vehicle equity lines of credit, are the latest, fast-growing form of high cost, high risk loans targeting cash strapped American consumers. Storefront and online lenders advance a few hundred to a few thousand dollars based on the titles to paid-for vehicles. Loans are usually for a fraction of the vehicle’s value and must be repaid in a single payment at the end of the month. Loans are made without consideration of ability to repay, resulting in many loans being renewed month after month to avoid repossession. Like payday loans, title loans charge triple digit interest rates, threaten a valuable asset, and trap borrowers in a cycle of debt.” * * *

Until it received a letter in August 2007 from Indiana’s Department of Financial Institutions advising it of the addition of the territorial-application provision to the code, Midwest had made title loans to Hoosiers (as Indianans like to call themselves) at annual percentage interest rates almost ten times higher than the maximum permitted by the code. They had a maturity of 12 to 24 months, were secured by the title to the borrower’s motor vehicle, and were for no more than half the vehicle’s estimated wholesale value. The loans were made only in person, at Midwest’s offices in Illinois—it had no offices in Indiana. The loan would be in the form of a cashier’s check payable to the borrower, drawn on an Illinois bank. * * *

Midwest advertised the loans on Indiana television stations and through direct mailings to Indiana residents. In 2006 it made more than two thousand such loans to Hoosiers, amounting to 9 percent of its loans that year. * * *

The state asserts an interest in protecting its residents from what it describes as “predatory lending.” * * *

A contrary school of thought points out that people who cannot borrow from a bank because they have poor credit may need a loan desperately. If a ceiling is placed on interest rates, these unfortunates may be unable to borrow because the ceiling may be too low for the interest rate to compensate the lender for the risk of default. As a result, they may lose their house or car or other property or find themselves at the mercy of loan sharks. * * *

We need not take sides in the controversy over the merits of “fringe banking.” It is enough that Indiana has a colorable interest in protecting its residents from the type of loan that Midwest purveys. * * *

The interference was with a commercial activity that occurred in another state. Each title loan that Midwest made to a Hoosier was in the form of a check, drawn on an Illinois bank, that was handed to the borrower at Midwest’s loan office and could be cashed there. Illinois was also where the conditional transfer of title to the collateral was made (the handing over of the keys—the “pawn”), and where the payments required by the loan agreement were received by Midwest. The contract was, in short, made and executed in Illinois, and that is enough to show that the territorial-application provision violates the commerce clause. Of course the loan proceeds were probably spent largely in Indiana, but the same would be true of the winnings of a Hoosier at a Nevada casino. The consequences of a commercial transaction can be felt anywhere. But that does not permit New York City to forbid New Yorkers to eat in cities in other states that do not ban trans fats from their restaurants.

Our conclusion is not altered by the fact that Midwest advertises in Indiana. If Indiana cannot prevent Midwest from lending money to Hoosiers in Illinois, it cannot prevent Midwest from truthfully advising them of this opportunity. A state may not “take the commercial speech that is vital to interstate commerce and use it as a basis to allow the extraterritorial regulation that is destructive of such commerce.” * * *

Nor is the location of the collateral in Indiana a critical difference between this case and the other cases that have invalidated extraterritorial regulations. It just illustrates that a transaction made in one state can have repercussions in another. A firecracker bought by an Illinoisan in Indiana could cause an injury to the purchaser in Illinois. That would allow an Illinois court, in a suit by the injured purchaser against the Indiana seller, to apply its own law. But it would not allow Illinois to forbid Indiana to sell firecrackers to residents of Illinois in Indiana merely because Illinois forbids firms in Illinois to sell firecrackers and thus would not be discriminating against an out-of-state business. A contract can always go wrong and if it does the consequences will often be felt in a different state from the one in which the contract was made and executed.


Posted by Marcia Oddi on January 28, 2010 12:26 PM
Posted to Ind. (7th Cir.) Decisions