Can Connecticut require an out-of-state lender that solicits Connecticut residents by mail, phone, or internet to get a small-loan license, and does that violate the Commerce Clause?
Plain-English summary
The Connecticut Attorney General concluded that the state's 2009 small-loan amendments reached out-of-state lenders soliciting Connecticut residents by mail, telephone, or internet, and that applying the licensing requirement to those lenders did not violate the Commerce Clause.
The Department of Banking had received a complaint from a Connecticut borrower about interest charged by an out-of-state small-loan lender. When the Department told that lender to license under Conn. Gen. Stat. § 36a-555, the lender objected on two grounds: a 1952 AG opinion had said mail lenders without a Connecticut presence were not subject to the statute, and any contrary application would violate the Commerce Clause under the Seventh Circuit's reasoning in Midwest Title Loans, Inc. v. Mills.
The AG responded that the 1952 opinion no longer controlled because Public Act 09-208 had amended § 36a-555 to expressly cover small loans offered to Connecticut consumers "through any method, including, but not limited to, mail, telephone, Internet or any electronic means." On the constitutional question, the AG distinguished Midwest Title Loans: Indiana's statute had deemed a loan made in Indiana whenever a resident contracted in another state after being solicited by an Indiana-targeted advertisement, with no part of the transaction occurring in Indiana. Connecticut's statute, by contrast, required under § 36a-573(b) that at least some element of the transaction (negotiation, agreement, or payment) occur in Connecticut. That tied the licensing requirement to in-state conduct and avoided the extraterritorial problem.
Currency note
This opinion was issued in 2011. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.
Background and statutory framework
Connecticut's small-loan licensing statute, Conn. Gen. Stat. § 36a-555, requires a license from the Department of Banking before anyone "engage[s] in the business of making loans of money or credit" of $15,000 or less at interest rates above 12 percent per year. Before 2009, the Department had relied on a December 23, 1952 AG opinion concluding that out-of-state lenders soliciting only by mail were not "engaged in the business of making small loans in Connecticut" and so were outside the statute.
Public Act 09-208 changed that. The 2009 amendment expanded the statute to cover any person who makes, offers, brokers, or assists a borrower in Connecticut to obtain a small loan "through any method, including, but not limited to, mail, telephone, Internet or any electronic means." A companion amendment to Conn. Gen. Stat. § 36a-573 added § 36a-573(b), which limited the statute's reach to loans where the borrower (1) negotiates the loan terms while physically in Connecticut, (2) enters into the loan agreement while physically in Connecticut, or (3) makes a payment in Connecticut.
The AG's dormant Commerce Clause analysis applied the standard three-part test from Selevan v. N.Y. Thruway Authority and Pike v. Bruce Church: a state regulation violates the Commerce Clause only if it (1) discriminates against interstate commerce, (2) imposes a burden incommensurate with the local benefits, or (3) practically controls commerce occurring entirely outside the state. The AG concluded that § 36a-555 cleared all three:
- No discrimination. The licensing requirements applied equally to in-state and out-of-state lenders.
- Burden vs. benefit. The burden (an $800 license fee, basic capital requirements, and potential examination costs) was modest compared with prior cases upholding similar licensing schemes. The local benefit (protecting consumers from usurious rates) was clearly legitimate; Congress had expressly preserved state authority over consumer-credit interest rates in 15 U.S.C. § 1610(b) and § 1601(b).
- No extraterritoriality. Because § 36a-573(b) tied jurisdiction to in-state negotiation, contracting, or payment, Connecticut was not regulating activity occurring entirely outside the state.
The AG distinguished the Seventh Circuit's contrary holding in Midwest Title Loans. There, the loan check was drawn on an Illinois bank, handed to the borrower in an Illinois office, with collateral transfer and payments all occurring in Illinois. The Seventh Circuit treated the contract as "made and executed in Illinois." Connecticut's statute required at least one piece of the transaction to occur in-state, so the same factual pattern could not arise.
Common questions
Q: Did the 1952 AG opinion still bind the Department of Banking after this 2011 opinion?
A: No. The 2011 opinion explained that the 1952 conclusion (that mail-only out-of-state lenders were not "engaged in the business" in Connecticut) was no longer accurate after Public Act 09-208 expressly extended § 36a-555 to mail, telephone, internet, and electronic transactions.
Q: What activity had to happen in Connecticut for the statute to apply?
A: Under § 36a-573(b), the borrower had to (a) negotiate or agree to loan terms in person, by mail, by telephone, or via the Internet while physically present in Connecticut, (b) enter into or execute the loan agreement while physically in Connecticut, or (c) make a loan payment in Connecticut.
Q: What about Midwest Title Loans, Inc. v. Mills?
A: The AG distinguished it. The Seventh Circuit had invalidated Indiana's analogous statute because every part of the Midwest Title loan transaction took place in Illinois. Connecticut's § 36a-573(b) required some Connecticut conduct, so the extraterritoriality concern that drove the Indiana ruling did not apply.
Q: Was the AG drawing on cases that approved similar state licensing schemes?
A: Yes. The opinion relied on Quik Payday, Inc. v. Stork (10th Cir. 2008), which upheld Kansas's nearly identical statute applied to a Utah payday lender, and on Silver v. Woolf (2d Cir. 1982), which had upheld Connecticut's debt-collection licensing scheme as a non-discriminatory burden on interstate commerce.
Q: Did the AG say anything about personal jurisdiction?
A: A footnote noted that § 36a-555 only applied where minimum contacts existed under the due process standard from Cogswell v. American Transit Insurance Co. (Conn. 2007) and Chloe v. Queen Bee of Beverly Hills, LLC (2d Cir. 2010). That kept the statute within "traditional notions of fair play and substantial justice."
Citations
Statutes: Conn. Gen. Stat. § 36a-555 (small-loan licensing); § 36a-573(b) (Connecticut nexus requirement); § 36a-563; § 36a-565; Public Act 09-208 (2009 expansion to mail/phone/electronic); Public Act 09-209, § 40; U.S. Const. art. I, § 8, cl. 3 (Commerce Clause); 15 U.S.C. § 1610(b), § 1601(b) (Truth in Lending preservation of state authority); Ind. Code § 24-4.5-1-201(1)(d); Kan. Stat. Ann. § 16a-1-201(1)(b).
Cases: Midwest Title Loans, Inc. v. Mills, 593 F.3d 660 (7th Cir. 2010); Pike v. Bruce Church, Inc., 397 U.S. 137 (1970); Selevan v. N.Y. Thruway Authority, 584 F.3d 82 (2d Cir. 2009); Bush v. Vera, 517 U.S. 952 (1996); Quik Payday, Inc. v. Stork, 509 F. Supp. 2d 974 (D. Kan. 2007), aff'd 549 F.3d 1302 (10th Cir. 2008); Silver v. Woolf, 694 F.2d 8 (2d Cir. 1982); Aldens, Inc. v. Packel, 524 F.2d 38 (3d Cir. 1975); A.S. Goldman & Co. v. New Jersey Bur. of Securities, 163 F.3d 780 (3d Cir. 1999); Chloe v. Queen Bee of Beverly Hills, LLC, 616 F.3d 158 (2d Cir. 2010); Cogswell v. American Transit Ins. Co., 282 Conn. 505 (2007).
Source
- Landing page: https://portal.ct.gov/AG/Opinions
- Original PDF: https://portal.ct.gov/-/media/ag/opinions/2011/051611smallloanlenderpitkin-pdf.pdf?rev=6b370f17f6364076b9812546eb93de38
Original opinion text
GEORGE JEPSEN
ATTORNEY GENERAL
55 Elm Street
P.O. Box 120
Hartford, CT 06141-0120
Office of the Attorney General
State of Connecticut
May 16, 2011
The Honorable Howard F. Pitkin
Department of Banking
260 Constitution Plaza
Hartford, CT 06103
Dear Commissioner Pitkin:
You have requested a legal opinion regarding whether Conn. Gen. Stat. §
36a-555, as amended by Public Act 09-209, § 40, alters a 1952 opinion issued by
the Office of the Attorney General concluding that a company located outside of
Connecticut that solicits and makes small loans by mail to Connecticut residents
is not engaged in the business of making loans in Connecticut. You have also
requested a legal opinion regarding whether application of recent amendments
expanding the scope of Conn. Gen. Stat. § 36a-555 to out-of-state small loan
lenders conducting business in Connecticut by mail, telephone, or electronic
means, violates the Commerce Clause of the United States Constitution.
I conclude that because § 36a-555 was amended in 2009 to expressly
cover small loans offered to Connecticut consumers "through any method,
including, but not limited to, mail, telephone, Internet or any electronic means," §
36a-555 now applies to out-of-state small loan lenders using these methods to
make small loans to Connecticut consumers. I also conclude that applying § 36a-555 to out-of-state small loan lenders conducting business by mail, telephone,
Internet or other electronic means does not violate the Commerce Clause. Courts
generally only invalidate state regulation of interstate commerce where such
regulation (1) clearly discriminates against interstate commerce in favor of
intrastate commerce, (2) imposes a burden on interstate commerce
incommensurate with the local benefits secured, or (3) has the practical effect of
extraterritorial control of commerce occurring entirely outside the state's
boundaries. Although a court's review may be fact specific, because § 36a-555
applies equally to in-state and out-of-state lenders, imposes relatively simple
registration requirements on lenders, and expressly requires that some elements of
the transaction take place inside Connecticut, I conclude that § 36a-555 passes
constitutional muster.
Background
Your opinion request related that the Department of Banking received a
complaint from a Connecticut borrower about the interest charged by an out-of-state small loan lender. When the Department of Banking sent a letter to the out-of-state lender informing it that it must be licensed by the Department of Banking
under section 36a-555, the out-of-state-lender's counsel responded that the out-of-state lender was not engaging in the business of making loans in Connecticut, and
had taken no action that would subject it to Connecticut's jurisdiction. Counsel
for the out-of-state lender further claimed that application of § 36a-355 would
violate the United States Constitution's Commerce Clause under the holding of
Midwest Title Loans, Inc. v. Mills, 593 F.3d 660 (7th Cir.), cert. denied 131 S. Ct.
83 (2010). The Midwest Title Loans court held that an Indiana banking law
violated the Commerce Clause because it attempted to regulate an Illinois lender
making loans to Indiana consumers, but without any portion of the loan
transactions actually occurring in Indiana.
Law and Analysis
Prior to the 2009 amendment to Conn. Gen. Stat. § 36a-555, the
Department of Banking relied on a 1952 opinion of this Office concluding that
out-of-state small loan lenders that did not have an office or agents in Connecticut
and solicited loan applications only by mail were not engaged in the business of
making small loans in Connecticut and therefore were not subject to Department
of Banking regulation. See Atty. Gen. Op. (December 23, 1952). On October 1,
2009, Public Act 09-208 amended Conn. Gen. Stat. § 36a-555 to require a person
who makes, offers, brokers, or assists a borrower in Connecticut to obtain a loan
of less than $15,000 at a rate of interest greater than 12 percent per annum
"through any method, including, but not limited to, mail, telephone, Internet or
any electronic means" to be licensed by the Department of Banking. Thus, it is
clear that by virtue of the amendment of § 36a-555 by Public Act 09-208, small
loan lenders who make loans to Connecticut residents by mail, telephone, or any
electronic means are now covered by § 36a-555 and must seek a license from the
Department of Banking (assuming other applicable requirements of banking law
are met).
You next ask whether application of § 36a-555 to out-of-state small loan
lenders making loans to Connecticut consumers would violate the Commerce
Clause. Application of § 36a-555 depends on meeting the requirements of § 36a-573(b). Section 36a-573(b) now requires that
The provisions of subsection (a) of this section shall
apply to any loan made or renewed in this state if
the loan is made to a borrower who resides in or
maintains a domicile in the state and such borrower
(1) negotiates or agrees to the terms of the loan in
person, by mail, by telephone or via the Internet
while physically present in this state; (2) enters into
or executes a loan agreement with the lender in
person, by mail, by telephone or via the Internet
while physically present in this state; or (3) makes a
payment of the loan in this state.
As a general matter, state statutes are presumed constitutional. See Bush
v. Vera, 517 U.S. 952, 992 (1996). More specifically, under the Commerce
Clause, U.S. Const. art. I, § 8, cl. 3, Congress has primary responsibility for
regulating interstate commerce. Nevertheless, the Supreme Court has recognized
a residuum of power in the state to make laws governing matters of local concern
which nevertheless in some measure affect interstate commerce or even, to some
extent, regulate it. Accordingly, [t]he Commerce Clause does not . . . invalidate
all State restrictions on commerce. A state statute or regulation may violate the
dormant Commerce Clause only if it (1) clearly discriminates against interstate
commerce in favor of intrastate commerce, (2) imposes a burden on interstate
commerce incommensurate with the local benefits secured, or (3) has the
practical effect of extraterritorial control of commerce occurring entirely outside
the boundaries of the state in question. Selevan v. N.Y. Thruway Authority, 584
F.3d 82, 90 (2d Cir. 2009) (internal quotation marks and citations omitted); see
also Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970) (holding that an
unconstitutional state regulatory burden on interstate commerce must be "clearly
excessive in relation to the putative local benefits"). Applying these factors, I
conclude that Connecticut's statute would not likely be held to violate the
Commerce Clause as long as it cannot be said that the transaction the State seeks
to regulate takes place "entirely outside" of Connecticut.
First, § 36a-555 clearly manifests no preference or protection for in-state
small loan lenders over out-of-state small loan lenders. The same licensing
requirements apply to in-state and out-of-state small loan lenders. "Where the
statute regulates even-handedly to effectuate a legitimate local public interest and
its effects on interstate commerce are only incidental, it will be upheld unless the
burden imposed on such commerce is clearly excessive in relation to the putative
local benefits." Pike, 397 U.S. at 142.
Second, Connecticut's interest in restricting the maximum interest rates
charged by small loan lenders is also clearly legitimate. Congress has recognized
the states' interest in regulating this aspect of consumer credit transactions in
Section 1610(b) of the Truth in Lending Act, 15 U.S.C. § 1610(b). As the
Kansas District Court held in Quik Payday, Inc. v. Stork, 509 F. Supp.2d 974 (D.
Kan. 2007), aff'd 549 F.3d 1302 (10th Cir. 2008), cert. denied 129 S. Ct. 2062
(2009), no case has even suggested that usury laws are not appropriate matters
for local regulation despite their burden on interstate commerce. Moreover, the
burden imposed on interstate commerce by § 36a-555 is relatively slight (an $800
licensing fee, meeting basic capital requirements, and potential examination
costs) and is similar to legal requirements upheld in the past. See Quik Payday,
Inc. v. Stork, 549 F.3d 1302, 1305 (10th Cir. 2008), cert. denied 129 S. Ct. 2062
(2009) (upholding a Kansas statute requiring a $425 license fee, a $500 surety
bond, and a criminal background check); Silver v. Woolf, 694 F.2d 8, 10 (2d Cir.
1982) (upholding Connecticut debt collection statute requiring $250 application
fee, sworn financial statement, and evidence of good moral character and
financial responsibility).
Finally, the requirements of § 36a-555 only apply if at least some of the
loan transaction in question occurs in Connecticut as described in Conn. Gen.
Stat. § 36a-573(b). The Connecticut borrower complaining about his out-of-state
lender did not provide details about his particular loan. Assuming that the loan
transaction meets one of the § 36a-573(b) requirements (that some of the loan
terms were negotiated by the consumer while the consumer was in Connecticut,
that the contract was agreed to by the consumer while the consumer was in
Connecticut, or that the consumer makes payments on the loan while the
consumer is in Connecticut), it is unlikely that a court would find the transaction
occurred wholly outside of Connecticut. Thus, application of § 36a-555 to an out-of-state, small loan lender does not amount to extraterritorial regulation of
interstate commerce occurring "entirely outside" of Connecticut because at least
some of the conduct occurs inside Connecticut.
Different courts have taken different approaches to the state's ability to
regulate out-of-state small loans. In Quik Payday, Inc. v. Stork, supra, the Court
of Appeals for the Tenth Circuit upheld application of a Kansas banking law to a
Utah lender. The lender, Quik Payday, made payday loans from its headquarters
in Utah and sought a declaratory judgment that Kansas could not regulate Quik
Payday under the Kansas Uniform Consumer Credit Code ("Kansas UCCC").
The Kansas UCCC required that payday lenders charging interest rates in excess
of 12 percent must be licensed by the Office of the State Banking Commission
("OSBC"). Under Kan. Stat. Ann. § 16a-1-201(1)(b), a consumer credit
transaction is deemed to have been made in Kansas if the "creditor induces the
consumer who is a resident of [Kansas] to enter into the transaction by solicitation
in [Kansas] by any means, including but not limited to: Mail, telephone, radio,
television or any other electronic means."
Quik Payday argued that the Kansas statute regulated interstate commerce
that happens entirely outside Kansas and gave the example of a Kansas resident
who is solicited on a work computer in another state, Missouri, and accepts the
loan on the same computer. Kansas argued that it is the borrower's physical
location at the time of the solicitation that is controlling, and that Kansas regulates
Internet payday lenders who choose to make payday loans with Kansas
consumers while the consumer is in Kansas. The Tenth Circuit held that it would
adopt Kansas's reasonable interpretation of the statute in finding that the Kansas
UCCC does not have a prohibited effect on extraterritorial commerce. The Tenth
Circuit also noted that even if the Kansas resident applied for a loan on a Missouri
computer, other aspects of the transaction, such as the transfer of funds, are likely
to be in Kansas, so that the transaction would not be entirely extraterritorial and
not be problematic under the dormant commerce clause. Quik Payday, 549 F.3d
at 1308.
In Quik Payday, the Tenth Circuit also applied a balancing test from Pike
v. Bruce Church, Inc., supra, to determine whether the burden on interstate
commerce was "clearly excessive in relation to the putative local benefits." Quik
Payday 549 F.3d at 1308 quoting Pike, 397 U.S. at 142. The burden created by
the Kansas UCCC was that Quik Payday had to be licensed, bonded, pay a $425
fee and submit to a criminal background check. The benefits included protecting
Kansas consumers from giving their financial information and access to their
bank accounts to felons, as well as through the surety bond requirement providing
Kansas residents with a meaningful remedy if they are harmed by the lender. The
Tenth Circuit held that the burden on Quick Payday of acquiring a license did not
outweigh the benefit gained by Kansas from imposing that requirement.
Additionally, in Silver v. Woolf, 694 F.2d 8 (2d Cir. 1982), cert. denied
460 U.S. 1070 (1983), the Court of Appeals for the Second Circuit upheld a
Connecticut statute requiring any person acting as a collection agency to be
licensed by the Department of Banking. The Second Circuit stated that under
Pike, the first question is whether the statute discriminated against out-of-state or
interstate commerce. The Second Circuit determined that the statute did not
exhibit any preference or protection of any sort for local as opposed to non-resident, collection agencies. Silver, 694 F.2d at 19. The court then applied the
Pike balancing test to hold that the state had a legitimate interest in regulating
debt collection practices and that requiring out-of-state companies to obtain the
same license as in-state companies was not such an excessive burden on interstate
commerce that it was prohibited by the Commerce Clause. Silver, 694 F.2d at 27-28.
As noted by counsel for the out-of-state lender whose conduct precipitated
this request, one court has taken a more narrow view of a state's ability to regulate
out-of-state small loan lenders. In Midwest Title Loans, supra, the Court of
Appeals for the Seventh Circuit relied on the extraterritorial element of the test to
find that an Indiana law requiring a company to get a license to make consumer
loans and abide by a ceiling on interest rates violated the Commerce Clause.
Midwest Title Loans, Inc. ("Midwest") was an Illinois company with no offices in
Indiana and that made loans in person in its Illinois office. The Indiana law at
issue provided that a loan was deemed to be made in Indiana if a resident of
Indiana "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, including by mail, brochure, telephone, print,
radio, television, the Internet, or electronic means." Ind. Code § 24-4.5-1-201(1)(d). While recognizing that Indiana had an interest in protecting its
residents from the type of loan offered by Midwest, the Seventh Circuit
determined that the Indiana law improperly attempted to regulate activities in
another state. Midwest Title Loans, 593 F.3d at 665-66. The court noted that
each loan made to an Indiana resident was in the form of a check drawn on an
Illinois bank that was handed to a borrower in Midwest's Illinois office, that the
transfer of title of collateral was made in Illinois, and that the payments required
by the loan agreement were received by Midwest in Illinois. The Seventh Circuit
concluded that the "contract was, in short, made and executed in Illinois, and that
is enough to show that the [Indiana law] violates the commerce clause." Midwest,
593 F.3d at 669.
With respect to Connecticut's out-of-state small loan lender law, because
some element of the loan is required to take place in Connecticut under § 36a-573(b), the law's application to out-of-state small loan lenders can be
distinguished from facts considered in Midwest Title, Inc., supra. As in Quik
Payday, Inc. supra, Connecticut would not be regulating conduct occurring
wholly outside Connecticut. Similar to Silver, supra, out-of-state small loan
lenders are subject to the same licensing requirements as in-state small loan
lenders, and Connecticut's legitimate interest in regulating small loan lenders
outweighs any burdens imposed on small loan lenders by § 36a-555.
Therefore, applying the foregoing law and court decisions to § 36a-555, I
conclude that application of § 36a-555 to out-of-state small loan lenders is
constitutional.
Very truly yours,
GEORGE JEPSEN
ATTORNEY GENERAL