Posner on Car Title Loans, Predatory Lending, and the Commerce Clause

by Deepak Gupta

Yesterday, Judge Posner issued an opinion that may be of some interest to those following the great debate over predatory lending and behavioral economics. As with many Posner opinions, its significance is of course enhanced by the author's identity. Although it doesn't actually take sides, the opinion devotes an unusual amount of space (for a judicial opinion) to citing and summarizing the leading research on predatory lending, including work by scholars such as Elizabeth Warren and Ronald Mann and consumer advocates such as Jean Ann Fox and Kathleen Keest, as well as their opponents on the right (e.g. Todd Zywicki). The opinion even takes note of the pending legislation to create a Consumer Financial Protection Agency, citing opinions pro and con, again without taking a position. But as we've noted here before, Posner has already taken a position on the legislation in his extrajudicial writings: He doesn't like it, and doesn't feel contrained by his judicial role from saying so.

The case concerns the constitutionality of an Indiana statute regulating car title loans (also known as car title pawns) -- loans with interest rates in the neigborhood of 300%, secured by cash-strapped consumers' vehicle titles, in which a lender advances a fraction of the vehicle's value to the consumer, who forks over a set of car keys to facilitate easy reposession in the event of default.  Indiana strictly regulates such loans through licensing requirements and interest-rate caps. But in neighboring Illinois, thanks to industry influence on state politics, it's a free-for-all. Concerned that Illinois-based lenders were evading the Indiana law by advertising directly to Hoosiers and entering into transactions on Indiana-titled vehicles, Indiana added a "territorial application" provision extending coverage to lenders that advertise to Hoosiers and then enter into transactions with them out of state.

Yesterday's decision strikes down that provision. It acknowledges that there's no economic protectionism or outright discrimination against interstate commerce at work here. Nevertheless, the court relies on a series of decisions forbidding extraterritorial regulation, including the Supreme Court's decision in Healy v. Beer Institute, 491 U.S. 324 (1989). The opinion concedes that Indiana isn't interfering with transactions with residents of another state, as in Healy, but focuses instead on the extraterritorial effect of interference with a commercial activity taking place in another state: "The contract was, in short, made and executed in Illinois, and that is enough to show that the territorial-application provision violates the commerce clause." 

The opinion makes some characteristically Posnerian analogies to illustrate that point, likening the law to an attempt by Indiana to ban its citizens from gambling in Las Vegas. "Of course the loan proceeds were probably spent in Indiana, but the same would be true of the winnings of a Hoosier at a Nevada casino. The consequences of a commercial transaction can be felt anywhere. But that does not permit New York City to forbid New Yorkers to eat in cities in states that do not ban trans fats from their restaurants."

So much for Indiana's attempt to protect its own consumers from one of the worst forms of predatory lending. But I wonder if Indiana can still get at the problem another way. The opinion notes that the loan company notifies the Indiana DMV of the loan as soon as it was made, so that the lender's security interest is protected against subsequent creditors, and that the repossessions occur in Indiana and the cars are auctioned off in Indiana. Surely Indiana would be well within its rights to regulate such conduct--particularly the use of its own DMV to prioritize the security interest--all of which occurs through the machinery of its own state government or within its own borders.

The case is Midwest Title Loans, Inc. v. Mills.  (Disclosure: Public Citizen, along with several other consumer groups, joined an amicus brief in this case authored by the Center for Responsible Lending.)

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