Minnesota’s Supreme Court ruled Wednesday that out-of-state payday lenders will have to follow the state’s strict lender law for Internet loans, rejecting an argument that the law is unconstitutional.
The ruling is viewed as important as more commerce moves to the Internet. Minnesota has been a leader in battling online payday lenders, which can charge exorbitant interest rates. Minnesota Attorney General Lori Swanson has filed eight lawsuits against online lenders since 2010 and has obtained judgments or settlements in each one.
Wednesday’s opinion by Justice David Stras sides with Swanson, who filed suit against Integrity Advance LLC in Delaware in 2011. Integrity made 1,269 payday loans to Minnesota borrowers at annual interest rates of up to 1,369%.A district court in 2013 concluded that the company violated Minnesota’s payday lending statutes "many thousands of times" and awarded $7 million in statutory damages and civil penalties to the state.
Integrity appealed to Minnesota’s Supreme Court, arguing that the state payday lending law was unconstitutional when applied to online lenders based in other states.
State law requires payday lenders to be licensed with the Minnesota Department of Commerce. It caps the interest rates they may charge and prohibits them from using the proceeds of one payday loan to pay off another.
“Unlicensed Internet payday lenders charge astronomical interest rates to cash-strapped Minnesota borrowers in contravention of our state payday lending laws. Today’s ruling signals to these online lenders that they must abide by state law, just like other “bricks and mortar” lenders must,” Swanson said.
Some online payday lenders try to evade state lending and consumer protection laws by operating without state licenses and claiming that the loans are only subject to the laws of their home state or country. In 2013, the Internet payday loan industry had estimated loan volume of $15.9 billion.
Fifteen states and the District of Columbia have effectively banned payday lenders. The U.S. military bans payday lenders from its bases. Nine of the 36 states that permit payday lending have tougher standards than Minnesota.
Minnesota Commerce Commissioner Mike Rothman expects to push for tighter payday lending rules during the 2016 legislative session, including limiting some fees and the number of loans made to one borrower. The moves have been supported by church and consumer groups but opposed by the payday industry.
The Commerce Department says lenders such as Minnesota-based Payday America can charge 100% or more in effective annual interest rate through multiple loans, rollover fees and other charges.
Chuck Armstrong, chief legislative officer for Payday America, said his company commends Swanson for her fight against unscrupulous payday lenders.
"Like her, we don’t want the bad guys operating outside the law. We are more than happy to work with regulators to stop these offenders,” he said.