In a January 28, 2010 opinion, Midwest Title Loans, Inc. v. Mills, the Seventh Circuit has affirmed a permanent injunction issued by the district court invalidating a section of Indiana’s version of the Uniform Consumer Credit Code for violating the Commerce Clause of the U.S. Constitution.
Indiana added a provision to the Code in 2007 called the “territorial application” provision. It states that a loan is deemed to occur in Indiana if a resident of the state “enters into a consumer sale, lease or loan transaction with a creditor … in another state and the creditor …has advertised or solicited sales, leases, or loans in Indiana by any means ….” If the territorial application provision is triggered, the lender becomes subject to the Code and is bound by its restrictions, including a ceiling on the annual interest rate that a lender may charge.
According to the opinion, Midwest Title is a car title lender. It makes high cost, high risk loans secured by the titles to paid-for vehicles. Loans are made for no more than half of the vehicle’s value for a term of one to two years. Midwest had made title loans to Indiana residents at annual percentage interest rates almost ten times higher than the maximum permitted by the Code. The loans were made only in person, at Midwest Title’s offices in Illinois – it had no offices in Indiana. The borrower was given an Illinois bank cashier’s check and was required to hand over a set of the car keys at the closing. Midwest Title would then notify the Indiana Bureau of Motor Vehicles of the loan so that it was noted on the borrower’s title to protect Midwest Title’s rights as a creditor. Midwest Title advertised the loans on Indiana television stations and through direct mailings to Indiana residents. Midwest Title stopped lending to Indiana residents when Indiana informed Midwest Title of the addition of the territorial application provision to the Code, and then commenced this action to enjoin the enforcement of the Code. The district court entered a permanent injunction, and Indiana appealed.
The Seventh Circuit held that because the contract between the consumer and the lender was made and executed in Illinois, the territorial application provision violates the Commerce Clause of the Constitution. The Court explained that it was not enough that Indiana has a legitimate interest in protecting its residents from predatory lending practices. The Court found that imposing the territorial application provision was interference with a commercial activity that occurred in another state, which is prohibited by the Commerce Clause. The fact that Midwest Title advertised in Indiana did not alter this result. The Court held that just as Indiana cannot prevent Midwest Title from lending money to its citizens in Illinois, it cannot prevent Midwest Title from truthfully advising them of that opportunity by advertising in Indiana.