Court: Online lenders must follow Pa. law
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Out-of-state payday lenders that offer high-interest loans to Pennsylvanians via the Internet must abide by the state's lending regulations, even if they don't have a physical presence here, according to a new court ruling.
The case -- Cash America Net of Nevada, vs. the Commonwealth of Pennsylvania and the Department of Banking -- may have implications for all payday lenders that operate online, whether they're offering loans in Pennsylvania or elsewhere.
"This decision, I suspect, is going to get a lot of national play," said attorney Rob Byer, head of the appellate law team at Duane Morris, the Philadelphia law firm that represented the state. That's because other states, like Pennsylvania, are struggling to limit predatory lending in its many forms.
Pennsylvania sets a maximum default lending rate of 6 percent; the only way to charge a higher rate is to meet its licensing requirements, and even then, there are restrictions on the size of the interest rate (usually the cap is around 27 percent).
But Cash America reportedly was charging the equivalent of 1,200 percent a year.
The Commonwealth Court ruling, handed down yesterday, concerns the "reach of Pennsylvania's usury laws," and the legality of a 2008 banking notice that said any party "engaging in nonmortgage consumer lending to Pennsylvania residents by any means, including by means of the Internet or by mail, constitutes engaging in such business in this Commonwealth," and thus is subject to Pennsylvania interest rate caps and licensing requirements.
Before that 2008 notice, the Department of Banking had allowed Internet loans from out-of-state institutions, so long as those lenders were governed by the laws of another state. But because Nevada's lending laws are so liberal, the banking department changed its stance.
The new notice said all non-depository entities making loans in excess of 6 percent, even out-of-state entities, must be licensed to do business here by Feb. 1, 2009.
Cash America challenged that notice, arguing that because it's out of state, Pennsylvania's "long arm" doesn't reach to Nevada (where the company is licensed to do business) or Delaware (where it is incorporated), and that Pennsylvania's 72-year-old banking regulations could not anticipate the advent of the Internet, and thus make no mention of out-of-state lenders.
In other words, it need not be licensed here to do business with Pennsylvania borrowers.
The court sided with the Department of Banking, and against Cash America, which, as one of the largest payday lending firms, earned $20 million from Internet loans to Pennsylvanians in 2007 and 2008.
"It is well settled in constitutional law that the regulation of interest rates is a subject within the police power of the state particularly when it comes to cases involving small loans, which profoundly affect the social life of the community," Judge Doris A. Smith-Ribner wrote for the majority.
The 4-3 ruling may be appealed. Judge Mary Hannah Leavitt wrote in the dissenting opinion that "simply, the initiative of the Department of Banking to abolish the business of payday loans in Pennsylvania has not been authorized" by the statutes at issue.
The state Department of Banking had no immediate comment on yesterday's ruling, but said one would be forthcoming on Monday.
First Published July 11, 2009 12:00 am
