A recent decision by the Minnesota Supreme Court serves as a painful reminder to Internet lenders of the perils of relying on choice-of-law provisions or arguments citing the Commerce Clause of the U.S. Constitution to avoid application of a borrower’s home state law. In its decision, the Supreme Court ruled that the Commerce Clause of the U.S. Constitution did not preclude Minnesota from applying its payday lending law to loans consummated in Delaware that are made to Minnesota residents over the Internet. The Minnesota Supreme Court joined the 10th Circuit which, under similar facts in Quik Payday Inc. v. Stork, also rejected a Commerce Clause challenge to the application of the borrower’s home state law to Internet payday loans.
The perils faced by Internet lenders seeking to avoid application of a borrower’s home state law also include the risk of a CFPB UDAAP enforcement action. Despite its lack of authority under the CFPB to regulate interest rates, the CFPB has brought two lawsuits against internet lenders in which it has claimed that the lenders engaged in UDAAP violations by making loans at rates that exceeded usury limits in the borrowers’ home states.
In December 2013, the CFPB filed a lawsuit in Massachusetts federal court against CashCall, several related companies and their principal. The companies allegedly funded, purchased, serviced and collected online payday loans made by a tribally-affiliated lender the CFPB did not sue. The CFPB charged the defendants with engaging in UDAAP violations by seeking to collect loans that were purportedly void in whole or in part under state law because the lender charged excessive interest and/or failed to obtain a required license.
In July 2015, the CFPB filed a complaint in federal district court in New York against a group of commonly-controlled companies for allegedly engaging in unlawful conduct in connection with making payday loans over the Internet. (In its press release, the CFPB described the action as a suit against an “offshore payday lender.”) According to the complaint, the defendants performed different functions such as purchasing leads from lead generation companies, brokering loans, originating loans, and collecting loans. The complaint alleged that the defendants made payday loans to residents of states in which the loans were void under state law because the defendants charged interest rates that exceeded state usury limits or the defendants failed to acquire required licenses. The CFPB claimed that the defendants engaged in UDAAP violations by actions that included misrepresenting that consumers were obligated to pay debts that were void under state law.