Rayna Keshavjee, Vice President
Overview
Pennsylvania anti-usury laws cap interest rates at around 6% for most loans below $50,000.¹ These limits tend to bar people without a high credit score, substantial collateral, or financial stability from borrowing because creditors will not lend them money. To work around this, many Pennsylvania residents have crossed state lines, despite facing extremely high interest rates, in order to borrow money. In this case, citizens of Pennsylvania go to TitleMax, which is a car loan company. TitleMax does not have brick-and-mortar stores or ads in Pennsylvania, nor are they incorporated there.
Allegedly, TitleMax was providing loans with interest rates as high as 180%.² By serving citizens of Pennsylvania, TitleMax records liens through Pennsylvania’s Department of Transportation, repossesses cars registered in Pennsylvania, and accepts payments made from Pennsylvania. However, TitleMax has seemingly no obligation to comply with Pennsylvania’s interest rate limits. Consequently, Pennsylvania issued a subpoena for TitleMax’s records because the state was investigating whether TitleMax illegally issued loans to Pennsylvania residents at interest rates exceeding the state’s legal caps. TitleMax refused the subpoena on the grounds that Pennsylvania could not apply their laws to an out-of-state lender because that would violate the dormant Commerce Clause, which prevents states from passing legislation that excessively burdens interstate commerce. The lower court initially ruled in favor of TitleMax, but the U.S Court of Appeals 3rd Circuit ruled that Pennsylvania did not violate the dormant Commerce Clause. The court reasoned that the state law did not have extraterritorial reach because TitleMax's transactions were not conducted entirely outside Pennsylvania. The court also found that the laws did not discriminate against out-of-stater lenders. Finally, the court concluded that Pennsylvania had a legitimate interest in protecting its residents from predatory lending and that any burden on interstate commerce was, at most, incidental compared to the state interest.
Significance
This decision resulted in a federal circuit split. In Midwest Title Loans, Inc. v. Mills, the U.S Court of Appeals 7th Circuit previously ruled that Indiana could not apply its credit laws to an out-of-state lender because the loan was physically executed across state lines. The 3rd Circuit rejected that approach in TitleMax, creating uncertainty over when a state may regulate an out-of-state lender whose customers live in that state. The Supreme Court declined to resolve the split when it denied TitleMax's petition for certiorari in 2022.
Furthermore, this decision strengthens the regulatory power of states. Before, the practice of setting up physical storefronts merely outside state lines was relatively common. However, with the TitleMax decision, states are able to penalize out-of-state companies for targeting their residents as a workaround of states’ interest rate caps.
These implications may extend to fintech and online lending. In the digital economy, the TitleMax decision strips a company’s immunity from state interest rate caps for the mere reason of servers and offices being located in a different state. Instead, this holding provides justification for requiring the digital economy to comply with the laws of where their customers are, rather than only where the company itself is present.
¹ TitleMax of Delaware, Inc. v. Weissmann, 24 F.4th 230 (3d Cir. 2022).
² TitleMax, 24 F.4th at 234.