The Pennsylvania Supreme Court has made it more difficult for Internet payday lenders to do business with Pennsylvania borrowers. The court recently ruled that Pennsylvania’s consumer banking laws apply to Internet payday lenders even if those lenders do not have any physical presence in the state. This ruling requires all Internet payday lenders – even those that do not have any offices or personnel in Pennsylvania – to be licensed with Pennsylvania’s Department of Banking to make payday loans in Pennsylvania.
On October 19, 2010, the court ruled in Cash America Net of Nevada, LLC v. Pennsylvania, No. 68 MAP 2009, that Internet payday lenders must be licensed by Pennsylvania’s Department of Banking to charge interest at more than 6 percent on loans under $25,000 in Pennsylvania, and such loans must comply with Pennsylvania’s Consumer Discount Company Act (CDCA).
The CDCA is best understood in the context of another statute -- Pennsylvania’s Loan Interest and Protection Law (LIPL). The LIPL caps interest rates on loans made by unlicensed lenders for less than $50,000 at 6 percent simple interest per annum. The CDCA provides an exception to the LIPL for lenders that are licensed by the department: a lender licensed under the CDCA may charge up to approximately 24 percent interest on loans of $25,000 or less.
The lawsuit was instituted by Cash America Net of Nevada, LLC (Cash America), a national payday lender, to enjoin and invalidate the Pennsylvania Department of Banking’s effort to expand the scope of the CDCA to apply to out-of-state lenders. In July 2008, the department disseminated a notice that stated that non-depository entities (like payday lenders) that extend loans for $25,000 or less at more than 6 percent simple interest per annum must be licensed by the department pursuant to Section 3.A of the CDCA. Interestingly, this pronouncement was an about-face from the department’s prior position that the CDCA did not extend to out-of-state lenders. The department justified its new stance based on the rise of Internet-based lending, which, according to the department, exposed Pennsylvania consumers to the practices that the CDCA was designed to prevent. Cash America argued that the department's notice was invalid and Cash America was not subject to Pennsylvania’s usury laws. In other words, Cash America asserted it could make payday loans to Pennsylvania borrowers at rates that exceeded Pennsylvania law.
The department filed a counterclaim against Cash America for violating the LIPL and CDCA by extending loans over the Internet to Pennsylvanians at interest rates well in excess of the 6 percent cap without a license. The department alleged, and Cash America admitted, that Cash America charged Pennsylvania borrowers interest at rates ranging from 260 percent to 1,140 percent. In July 2009, the Commonwealth Court ruled in favor of the department, finding that Cash America violated the LIPL and CDCA by charging those rates. Cash America took an appeal to the Pennsylvania Supreme Court.
On appeal, Cash America’s claim and the department’s counterclaim hinged on the meaning of Section 3.A of the CDCA. Cash America, a Delaware LLC with no offices, employees, or agents in Pennsylvania, argued that the plain language of Section 3.A did not support the department’s extension of the reach of the CDCA to out-of-state lenders. The key language of Section 3.A provides that “no person shall engage . . . in this Commonwealth, either as principal, employee, agent or broker, in the business of negotiating or making loans or advances of money on credit, in the amount or value of twenty-five thousand dollars ($25,000) or less, and charge, collect, contract for or receive interest” in excess of 6 percent unless the lender is licensed by the department (emphasis added). Cash America argued that by the wording of the CDCA, it does not apply to lenders that do not have personnel in Pennsylvania.
In rejecting this argument, the Supreme Court relied on the classic editor’s guide The Elements of Style by Strunk and White as support for its conclusion that the phrase “either as principal, employe, agent or broker” is a non-restrictive clause, as it is set off by a pair of commas, and therefore does not restrict the meaning of “in this Commonwealth.” According to the court, the key language in Section 3.A means that the CDCA regulates a lender’s activity in Pennsylvania regardless of whether it has personnel in the state.
The court held that out-of-state payday lenders (with no personnel in Pennsylvania) must be licensed by the department to extend loans to Pennsylvania borrowers for less than $25,000 at rates in excess of the 6 percent cap. Further, once licensed, out-of-state payday lenders must comply with the CDCA’s lending requirements, which caps interest rates on loans under $25,000 at approximately 24 percent. The Supreme Court reasoned that to rule otherwise “would subject in-state lenders to regulation pursuant to the CDCA while simultaneously creating a de facto licensing exemption for out-of-state lenders, who could then engage in the very lending practices that the CDCA prohibits.”
This holding has great significance for Internet payday lenders that have no physical presence in Pennsylvania. If these lenders want to extend loans to Pennsylvania borrowers for less than $25,000 at a rate of more than 6 percent, the lenders must become licensed with the Pennsylvania Department of Banking and their loans to Pennsylvanians must comply with the rates, terms, and conditions set forth in the CDCA. In particular, the maximum rate of interest that licensed out-of-state lenders may charge on loans to Pennsylvanians for under $25,000 is approximately 24 percent. This 24 percent interest rate cap effectively eliminates any non-bank payday lenders from operating in Pennsylvania.