The Minnesota Supreme Court has ruled that out-of-state payday lenders who offer loans to Minnesota residents over the Internet are subject to the same restrictions as bricks-and-mortar lenders.
The ruling comes in a 2011 lawsuit filed by state Attorney General Lori Swanson against Integrity Advance, a lender based in Delaware that was making short-term loans over the Internet to Minnesota borrowers at interest rates as high as 1,369 percent per year, the Forum News Service reports.
A district court in 2013 ruled that Integrity violated Minnesota’s payday lending laws “many thousands of times” and awarded $7 million in damages to the state.
Not licensed in Minnesota
Minnesota law regulates payday lenders by setting limits on the interest rates and fees they can charge and the length of time a loan can last, and require lenders to be licensed to do business in Minnesota.
The law covers short-term loan transactions that occur "if the borrower is a Minnesota resident and the borrower completes the transaction, either personally or electronically, while physically located in the state of Minnesota.”
Integrity had argued it didn't have to abide by the law because it was not physically present in Minnesota and it approved the transactions in Delaware. It also claimed the restrictions interfered with interstate commerce, which would be unconstitutional.
But the Supreme Court rejected those arguments Wednesday in a unanimous ruling.
The justices noted that many aspects of Integrity's loan transactions took place in Minnesota.
"[The company] has never applied for, nor received, a license from the Minnesota commissioner of commerce to operate as a Minnesota lender. Yet Integrity has made 1,269 payday loans to borrowers who indicated on their applications that they resided in Minnesota. In the process of extending those loans, Integrity called or sent e-mails to borrowers, employers and banks within Minnesota."
Costs spiral upward quickly
Payday loans are designed to be a short-term stop-gap for people short of cash as they approach their next paycheck, but have a notorious reputation for charging interest rates that can be in the thousands of percent.
In Minnesota, the amount lenders can charge in interest is capped depending on how much you borrow – ranging from a maximum fee of $5.50 for borrowing under $50, to a 33 percent annual interest rate plus a $25 fee on loans between $350 and $1,000.
But these costs can spiral given that customers who are unable to pay off their loans on time are allowed to “roll over” their loans – taking out another payday loan to cover their repayments – which effectively compounds the interest and causes repayment amounts to spiral upward quickly.
Swanson has sued eight online lenders in the past few years and according to the Star Tribune, she has reached settlements or won judgments against all of them.
Earlier this year the State Commerce Department took action against five interstate lenders.
Figures from Minnesotans for Fair Lending claim state residents paid out $82 million in payday loan fees between 1999 and 2012.