Minnesota Appeals Court Upholds State Regulation Of Online Payday Lender
On March 31, the Minnesota Court of Appeals held that the Minnesota state legislature may regulate the activities of online payday lenders that extend loans to individuals residing within the state’s borders, even if the lender’s operations are based in a different state. State of Minn. v. Integrity Advance, LLC, No. 62-CV-11-7168, 2014 WL 1272279 (Minn. Ct. App. Mar. 31, 2014). The state of Minnesota alleged that an online payday lender violated Minnesota law by charging high annual interest rates, automatically rolling-over loans for extended periods, and failing to obtain a state lending license. The lender argued that the dormant commerce clause of the U.S. Constitution, which prohibits states from discriminating against or unduly burdening interstate commerce, prevented the Minnesota legislature from regulating the lender because the lender received and accepted Minnesotans’ loan applications at its place of business in Delaware, where the loans were consummated. The court rejected the lender’s argument and held that the U.S. Constitution permits states to regulate commercial transactions that affect their citizens so long as the transactions are not “wholly extraterritorial” – that is, occurring entirely outside of the state’s borders. The court determined that the online lender’s loans were not “wholly extraterritorial” because the lender (i) accepted loan applications online from Minnesota residents that indicated the applicant resided and worked in Minnesota; (ii) contacted Minnesotans in their home state approximately 27,944 times for loan underwriting and other business purposes; and (iii) deposited loan funds directly into Minnesota borrowers’ bank accounts. The court also upheld the district court’s award of $7 million in civil and statutory damages against the lender, finding that the lower court did not abuse its discretion since the award amounted to only 21% of the statutorily-allowed amount.