The Third Circuit Court recently held in TitleMax of Delaware, Inc. v. Weissmann that application of Pennsylvania’s usury laws to lenders in Ohio, Virginia, and Delaware is not a violation of the commerce clause even when the loans in question originated entirely in the lenders brick-and-mortar locations outside of Pennsylvania because the out of state transactions do not occur “wholly outside” of the state of Pennsylvania.

Generally, under the dormant commerce clause a state law cannot be a direct control on commerce that occurs outside of its borders; this is known as the extraterritoriality principle.  The Third Circuit in this case determined that even when the loan is originated entirely outside of the borders of the resident state the lenders servicing of the loan, collections activities, lien titling, and possible repossession of collateral were sufficient contacts with the resident’s state to determine that the lending transaction did not occur “wholly outside” of the resident’s state. Therefore, the extraterritoriality principle of the dormant commerce clause is not violated by subjecting out of state lenders to the usury laws of the state of residence of the borrower because of the other activities connected with the loan beyond origination.

Having found sufficient state connections the Court then determined that a lender being subjected to multiple differing interest rate limits that depend on the state of residency of the borrower did not place an undue burden on the lender or on interstate commerce. The court concluded because there were sufficient state contacts to make the loans subject to state usuary laws and there was not an undue burden on interstate commerce applying such laws is permissible under the dormant commerce clause.

It should be noted that the Seventh Circuit Court has previously held the opposite, that applying state usuary laws to loans which originated out of state does violate the commerce clause. Under similar circumstances in Midwest Title Loans, Inc. v. Mills, 593 F.3d 660 (7th Cir. 2010) the seventh circuit ruled an Indiana statute violated the dormant commerce clause when it allowed Indiana to subject out of state lenders to its usury laws. In its decision in Titlemax the Third circuit declined to follow the Seventh Circuits Midwest Title Loans decision as unpersuasive. Therefore, the Titlemax decision now sets up a circuit court split of authority on the issue and there is potential for Supreme Court review in the future.

Lenders outside of the 7th Circuit should be aware of and abide by the usury limits of the state their borrowers actually reside in, rather than the limits of the state the loan was originated in.

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