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| The Seventh Circuit Rules the Application of Indiana’s Uniform Consumer Credit Code to an Illinois Lending Company Violates the Commerce Clause |
| Posted: February 3, 2010 |
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This past week, the U.S. Court of Appeals for the Seventh Circuit held that the application of Indiana’s Uniform Consumer Credit Code (“UCCC”) to an Illinois company, which had offices only in Illinois, but advertised and made loans to a significant number of Indiana residents just across the state line, violated the commerce clause of the U.S. Constitution.1
In Midwest Title Loans, Inc. v. Mills, 2010 WL 308967 (7th Cir. Jan. 28, 2010), the Seventh Circuit upheld the district court’s permanent injunction, which prevented the application of Indiana’s UCCC against Midwest Title Loans, a “car title lender” located in Illinois. The “territorial application” provision of the UCCC provides 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.” Ind. Code § 24-4.5-1-201(1)(d). And for loans that are deemed to occur in Indiana under this “territorial application” provision, the lender then becomes subject to Indiana’s UCCC, meaning it must obtain an Indiana license to make consumer loans and it is bound by a number of restrictions, including a ceiling on the annual interest rate that lender may charge on its loans. Indiana’s UCCC was enacted to protect Indiana residents from predatory lending.
Midwest Title Loans (“Midwest”) made title loans to Indiana residents at annual percentage interest rates almost ten times higher than the maximum rate permitted under Indiana’s UCCC. The title loans had a maturity of 12 to 24 months, were secured by the title to the debtor’s motor vehicle, and were made for less than half of the vehicle’s estimated value. The loans had to be made in person at Midwest’s offices in Illinois, and Midwest would pay the debtor a cashier’s check drawn on an Illinois bank. The debtor would then be required to provide Midwest with a set of car keys to enable Midwest to exercise self-help repossession of the car in the event of default so that Midwest would not need to enforce its lien in court should the debtor default (due to the small size of the loan). Ten of Midwest’s 23 offices in Illinois were located within about 30 miles of the Indiana state line. Midwest advertised its loans on Indiana television stations and through direct mailings targeted to Indiana residents. In 2006, 9% of Midwest’s loans were made to Indiana residents. However, Midwest discontinued its lending to Indiana residents once it learned about the “territorial application” provision added to Indiana’s UCCC in 2007.
In holding that Indiana’s UCCC does not apply to Midwest, the Seventh Circuit compared this case to that of Healy v. Beer Institute, 491 U.S. 324, 337 (1989), in which Connecticut enacted a "price affirmation" law requiring brewers to commit that prices they charged for beer in Connecticut would not be any higher than the lowest prices charged in a state bordering Connecticut. The U.S. Supreme Court invalidated the law because Connecticut would be regulating prices in another state, albeit indirectly.
The Seventh Circuit also compared the Midwest Title Loans, Inc. case to the hypothetical of Indiana banning casinos from conducting business in Indiana due to massive gambling problems and requiring out-of-state casinos to obtain Indiana licenses that would limit an Indiana resident from gambling more than $10 per day. The Seventh Circuit found: "A state law of that kind, however well intentioned and genuinely beneficial to the state imposing it, would burden interstate commerce by restricting travel and a firm's ability to deal with residents of a different state, even though the law treated out-of-state businesses no worse (in our example, even slightly better) than businesses located in the state.” Midwest Title Loans, Inc., at *5.
The Seventh Circuit concluded that allowing Indiana to apply its own state’s laws to title loans when its residents enter into such loans in a different state, which has a different law, would arbitrarily and improperly exalt the public policy of one state over that of another. Id. at *6. Even though all of the commercial activity involved with the title loans occurred in Illinois, the Seventh Circuit emphasized the contract was “made and executed in Illinois, and that is enough to show that the territorial-application provision violates the commerce clause.” Id. at *8.
For consumer lenders similarly situated to Midwest, the Seventh Circuit’s decision prevents such lenders from being subjected to the conservative restrictions of Indiana’s UCCC, including the impositions of ceilings on the annual interest rates.
1 The commerce clause at Article I, § 8, cl. 8 of the U.S. Constitution has been interpreted to bar States from establishing tariff walls or other harmful barriers to trade across state lines.
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