Decision in subpoena dispute concerning for auto finance, too, attorney says

An appeals court's decision that supports holding an out-of-state TitleMax title lender to Pennsylvania's usury laws could be problematic for auto lenders, an industry attorney said.

"This case is worrisome for a lot of reasons," Hudson Cook Chairman Michael Benoit told Automotive News last month.

The 3rd U.S. Circuit Court of Appeals' Jan. 24 ruling in TitleMax v. Weissmann also has ramifications for financial services beyond auto lenders, he said.

A unanimous three-judge panel reversed a decision by U.S. District of Delaware Magistrate Judge Mary Pat Thynge, who had granted summary judgment to TitleMax in 2020 after it sued to challenge a subpoena from then-Pennsylvania Department of Banking and Securities Secretary Robin Weissmann's office. TitleMax quit writing loans to Pennsylvania residents after the subpoena and says it has lost revenue because of it, according to the appellate court.

TitleMax argued Pennsylvania couldn't apply the state's usury laws when Pennsylvania residents physically obtained loans in other states, citing the Dormant Commerce Clause.

"I don't think the lower court was wrong," Benoit said.

Neither TitleMax nor its counsel have responded to requests for comment.

Pennsylvania caps dealer-financed personal auto loans — including paper immediately sold to a lender in an indirect financing scenario — at either 18 or 21 percent interest, depending on the vehicle's age. However, no cap exists under direct lending involving banks, and direct credit union financing is capped at 18 percent.

State law caps many other loans, including TitleMax's, at 6 percent, according to the 3rd Circuit opinion by Judge Patty Shwartz. TitleMax interest can reach as high as 180 percent, the opinion said.

"Pennsylvania has a strong interest in prohibiting usury," Shwartz wrote for the court. "Applying Pennsylvania's usury laws to TitleMax's loans furthers that interest, and any burden on interstate commerce from doing so is, at most, incidental. Pennsylvania may therefore investigate and apply its usury laws to TitleMax without violating the Commerce Clause."

Benoit said the appellate court was trying to "thread a procedural needle." The decision only means the Pennsylvania agency can conduct its civil investigation, he said.

"It really hasn't gotten to the merits yet," Benoit said.

According to the opinion, the state had only petitioned the court to enforce its subpoena, "not to sanction TitleMax."

Essentially, the state hasn't taken any action against TitleMax other than to ask for its records.

However, Benoit said it would be odd for the court to permit the expense of discovery if it ultimately felt the state couldn't enforce the usury law to transactions such as TitleMax's.

"That's the reason it's troublesome, primarily," Benoit said.

Benoit said he could understand if Pennsylvania was regulating a loan taken out online within a resident's home.

"To me, its quite something else when you physically cross the border and submit yourself to the jurisdiction of another state," he said.

He gave the example of a loan taken out in Florida at a higher rate than what's permitted in Pennsylvania. When the borrower moves to Pennsylvania, the lender is told they can't collect.

"To me, that creates a huge problem for interstate commerce," Benoit said.

Rewriting contracts whenever a buyer or borrower moved was "untenable," he said.

TitleMax put liens on Pennsylvania property, collected from Pennsylvania customers and had the ability to repossess Pennsylvania vehicles, according to the appellate court. Auto finance companies also create liens, receive payments and repossess vehicles, according to Benoit.

"Thus, by extending loans to Pennsylvanians, TitleMax takes an interest in property located and operated in Pennsylvania," Shwartz wrote.

However, the appellate court's ruling has been contradicted by a federal court decision Feb. 8, according to Benoit.

California, Illinois and New York disagreed with an Office of the Comptroller of the Currency rule allowing national banks to transfer loans to third parties without an effect on the interest rate. The states argued this allowed lenders to circumvent their state usury laws by acquiring loans from national banks able to write higher-interest loans.

But Northern District of California Judge Jeffrey White ruled in California v. OCC that the rule wasn't unreasonable.