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Court Overturns State Law Protecting Borrowers From High Interest Loans

A federal appeals court struck down an Indiana consumer-protection law that sought to regulate out-of-state loans targeted at Indiana residents. The language of the opinion was grounded on U.S. constitutional principles, which makes it a problematic opinion that may bolster challenges to similar consumer protection laws in other states.


AARP Indiana worked with the Indiana Department of Financial Institutions (DFI) supporting passage of 2007 legislation that mandates that out-of-state lenders who solicit Indiana borrowers comply with Indiana law. The state law imposes Indiana licensing and regulatory requirements on out-of-state lenders who solicit (through advertisements, mail or other means) borrowers in the state of Indiana and restricts lenders from charging more than 36 percent annual interest.

After the law was passed, DFI sent letters to various lenders, including Illinois car title lenders, threatening them with enforcement action if they continued to make loans to Indiana consumers in excess of 36 percent. Midwest Title Loans, a car title lender based in Illinois charges interest rates in excess of 36 percent, sued DFI seeking to invalidate the law.
A federal district court held, in Midwest Title Loans v. Ripley that the state law was unconstitutional and an improper attempt to regulate interstate commerce in violation of the "dormant commerce clause," a principle that prohibits states from interfering with interstate commerce or regulating affairs in other states that are "wholly unrelated" to the state enacting the law. Defendants appealed.

AARP's Brief

Attorneys with AARP Foundation Litigation filed AARP's "friend of the court" brief in the appeal, along with the Center for Responsible Lending and other consumer protection advocacy groups and legal services organizations.

The brief detailed the pernicious effects car title loans and other alternative financing options have on working families who are living at the margin, outlines how these alternative financing services are often deceptively and aggressively marketed, and pointed out that the dormant commerce clause only prevents states from covering activities that are entirely outside state lines.

AARP's brief noted that the lender involved in the case was doing significant business voluntarily within Indiana's state borders. The lender intentionally directs mail, television and phone book advertisements at Indiana consumers, records liens with the Indiana Bureau of Motor Vehicles, makes collection calls to Indiana consumers, contracts with firms to repossess and auction cars in Indiana and obtains Indiana titles to cars repossessed from Indiana consumers. In the words of the brief, "Midwest Title seeks to reap the benefits of Indiana law by using it and its officials to perfect security interests in Indiana residents' cars, while at the same time claiming exemption from Indiana law that would constrain the ability to enforce loans that violate Indiana law."

The Decision

The appeals court agreed with the trial court that the law violated the U.S. Constitution's "dormant commerce clause," a principle that prohibits states from interfering with interstate commerce or regulating affairs in other states if those activities are "wholly unrelated" to the state enacting the law.

While the appeals court noted that Indiana had "colorable interest in protecting its residents from the type of loan that Midwest purveys," it also gave credence to the argument of the lender that title loans might be "a good thing" and ruled that Indiana's law impermissibly sought to regulate business in a different state. It further ruled that Indiana could not prohibit the Illinois business from advertising in Indiana.

Although the facts of this case concern regulation of car title lenders, the case impacts regulation of many other types of alternative financial services, including payday loans, targeted to low-income and working poor consumers, residents of minority neighborhoods and individuals with heavy debt burdens or less favorable credit histories.

AARP seeks to ensure that consumers — particularly those who are cash-strapped or living at the margins — are not preyed upon with high interest, high fees and misleading loan terms.  Indiana's law is an important step in the right direction and the decision is a significant disappointment.