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The ruling sides with Attorney General Lori Swanson, who filed suit against Integrity Advance, LLC in Delaware in 2011. The company made 1,269 payday loans to Minnesota borrowers at annual interest rates of up to 1,369 percent.
In 2013, a district court concluded that the company violated Minnesota's payday lending statutes "many thousands of times" and awarded $7 million in statutory damages and civil penalties to the state. The company appealed to the Supreme Court, arguing that the state payday lending law was unconstitutional when applied to online lenders based in other states.
In Wednesday's opinion by Justice David Stras, the court rejected that argument, holding that Minnesota's payday lending law is constitutional.
"Unlicensed Internet payday lenders charge astronomical interest rates to cash-strapped Minnesota borrowers in contravention of our state payday lending laws. Today's ruling signals to these online lenders that they must abide by state law, just like other "bricks and mortar" lenders must," Swanson said.
The ruling is significant as more commerce moves to the Internet. Minnesota has been a leader in combating online payday lenders, which can charge extremely high interest rates. Swanson has filed eight lawsuits against online lenders since 2010 and has obtained judgments or settlements in all of them.
The benefit of payday loans is that they allow borrowers to pay their basic living expenses in advance of their next paycheck. However, many borrowers rely on the loans as their main source of long-term credit and don't repay them on time, incurring extra charges.
State law requires payday lenders to be licensed with the Minnesota Department of Commerce. It caps the interest rates they may charge and prohibits them from using the proceeds of one payday loan to pay off another.
Some online payday lenders try to evade state lending and consumer protection laws by operating without state licenses and claiming that the loans are only subject to the laws of their home state or country. In 2013, the Internet payday loan industry had estimated loan volume of $15.9 billion.
"We compliment Attorney General Swanson on winning this case and protecting the consumers of Minnesota," said Chuck Armstrong, chief legislative officer for Burnsville-based Payday America. "Like her, we don't want the bad guys operating outside the law. We are more than happy to work with regulators to stop these offenders."
Fifteen states and the District of Columbia have effectively banned payday lenders. The U.S. military bans payday lenders from its bases. Nine of the 36 states that permit payday lending have tougher standards than Minnesota.
Tighter rules sought:
Minnesota Commerce Commissioner Mike Rothman plans to push again for tighter rules during the 2016 legislative session, including limiting some fees and the number of loans made to one borrower. The moves have been supported by church and consumer groups but opposed by the payday industry, which has had clout with key legislators.
The Commerce Department says lenders like Payday America can charge 100 percent or more in effective annual interest rate through multiple loans, rollover fees and other charges. Fees can amount to more than the original loan and lead to perpetual debt.
"The Attorney General should be commended for obtaining the Minnesota Supreme Court's solid affirmation that the Minnesota law … does not violate the Commerce Clause," said Ron Elwood, supervising attorney for the Legal Services Advocacy Project in St. Paul.
Meanwhile, Sunrise Community Banks of St. Paul recently won a $2.2 million national award for an alternative product that provides emergency, unsecured loans through employers that must be paid back within one year at a maximum effective rate of 25 percent. Larger banks say they are working with regulators to devise similar small-loan products.