AARP asked the Supreme Court to reverse a decision that impedes state efforts to protect their residents against some of the most egregious predatory lending practices. AARP Indiana had actively supported enactment of the law in question. The court declined to consider the case.
Midwest Title Loans charges borrowers an annual percentage rate of 300 percent for small amounts of cash secured by titles to their cars. Relying on a business model common to the car title lending industry, the company loans the money for a short period of time (usually 30 days) and allows the borrower to extend the loan at the end of that period — for an additional fee — often trapping a borrower in an endless spiral of debt. When the borrower defaults, the company can repossess the car without going to court because of the agreement the borrower signs, recordation of a lien with the state motor vehicles agency and possession of a set of car keys obtained at the time the loan is made.
Car title loans are part of a class of predatory loan products that are growing by leaps and bounds, and that are increasingly subject to state scrutiny. In fact, most states now regulate car title lending, in part because of concerns about the vital link between consumers ability to maintain a reliable form of transportation and ability to work, contribute to economic vitality and provide families access to medical, education and emergency needs — needs the states must meet if families cannot. The Department of Defense considers both payday loans and car title loans predatory.
Despite governmental concerns, lenders keep finding new ways to skirt regulatory laws. The availability of marketing credit options on the Internet has enabled many lenders to evade state laws, characterizing the transactions as originating in a less regulated state despite the fact that the entire face-to-face transaction may take place in a more regulated state. Others market across state lines, seeking to reach borrowers just over the border of a more regulated state.
The State Law
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 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 that charges interest rates in excess of 36 percent, sued DFI seeking to invalidate the law.
States are prohibited by the U.S. Constitution from regulating the business activities in other states or regulating transactions in a way that impedes commerce across state lines, and Midwest invoked this clause in challenging the law. A trial court and appeals court agreed with Midwest and ruled that the law violated the Constitution. The state of Indiana asked the U.S. Supreme Court to consider the matter and the court declined.
Attorneys with AARP Foundation Litigation filed AARP's "friend of the court" brief in the appeal, jointly 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 points 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 is doing significant business voluntarily within Indiana's state borders and states should be able to pass consumer protection laws that protect their residents. In this case, 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.
Although the facts of this case concerned 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. The decision of the U.S. Supreme Court not to disturb the ruling in Mills v. Midwest Title Loans is a disappointment.