Out-of-state lenders can't avoid Conn. laws, Jepsen says

Jessica M. Karmasek May 18, 2011, 11:53am


HARTFORD, Conn. (Legal Newsline) - Connecticut Attorney General George Jepsen says out-of-state small loan lenders are equally subject to Connecticut laws.

Jepsen submitted his nine-page opinion to Howard F. Pitkin, commissioner of the Connecticut Department of Banking, on Monday.

As banking commissioner, Pitkin has jurisdiction over the state's laws pertaining to commercial banks, savings banks, savings and loan associations, credit unions, consumer credit, broker-dealers, investment advisers, securities, tender offers and business opportunities.

Pitkin had requested Jepsen's legal opinion regarding whether Connecticut General Statute 36a-555, as amended by Public Act 09-209, alters a 1952 opinion issued by the Attorney General's Office concluding that a company located outside of Connecticut that solicits and makes small loans by mail to residents is not engaged in the business of making loans in Connecticut.

He also requested Jepsen's opinion on whether application of recent amendments expanding the scope of 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 U.S. Constitution.

Pitkin's request came after 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 sent a letter to the out-of-state lender informing it that it must be licensed by the department under section 36a-555, the out-of-state-lender's counsel responded that the 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. The lender's counsel further claimed that application of 36a-355 would violate the Commerce Clause.

Jepsen concluded 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," it now applies to out-of-state small loan lenders using these methods to make small loans to in-state consumers.

The attorney general also concluded 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," Jepsen wrote.

"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."

Jepsen points to the case at hand.

"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," he wrote to Pitkin.

"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."

From Legal Newsline: Reach Jessica Karmasek by e-mail at jessica@legalnewsline.com.

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