There are a host of issues arising from making consumer loans across state lines, even if the finance company has a licensed office in both states. Over the next couple of weeks, I want to address some of these questions presented by this situation, including:
- Must the lender be licensed in the borrower’s state of residence?
- What if the loan is consummated in the lender’s state?
- What if there is collateral requiring perfection in the borrower’s state?
- When is the lender “doing business” in the borrower’s state?
- Which state’s law applies?
I understand that the answers to each of these questions is a matter of state law and often the subject of state regulatory consideration. But, there are some common themes to explore, and the application of the Interstate Commerce clause of the US Constitution has a role to play as well.
So, let’s get started this week with the following hypothetical fact situation:
A finance company with a licensed office in a border city (think--Phenix City, Columbus, Chattanooga, Kingsport, Augusta, Shreveport, Natchez, Louisville, Port Arthur, Memphis, Florala, Pascagoula*) makes loans to consumers in the bordering state. The company does not have a loan license in the border state. The company and the office do not generally solicit loans in the border state, but on occasion do make loans to non-resident consumers. The company does insist that the consumers come to its licensed locations to consummate the loans. And, the company does use its home state laws and regulations in setting the contract terms.
See any problem?
Well, more times than not, this fact scenario should not cause a problem. The licensed offices are not actively soliciting business in the neighboring states and let’s assume that they are not sending out their agents into the neighboring states to pull the borrowers into the home state. That is, the loan transaction is one involving interstate commerce. As an interstate transaction, the home state terms and rates should be permissible as the transaction is consummated in the home state.
However, some states have taken the position that consumer finance is a matter of “public policy” in their states, and that therefore no lender may make loans to residents of their states—even if consummated electronically—that would violate the restrictions of their states including the need for licensing of the lender.
And, there may be more “contacts” with the neighboring state than seems apparent at first blush. For example, a UUC-1 or a vehicle title certificate will require recording in the neighboring state. Such additional factor may increase the contacts with the neighboring state and cause the company to be doing business in the neighboring state. More about that next week.
Practice Pointer: It is always best to confirm with counsel and the regulators as to what is required when lending to consumers residing across state lines.
Please note: This is the fifty-fifth blog in a series of Back to Basics blogs, in which relevant and resourceful information can be easily accessed by clicking here.