The Pennsylvania Department of Banking (DOB) has agreed to delay taking steps to require out-of-state Internet lenders to be licensed under the state Consumer Discount Company Act (CDCA). The agreement came after a lender that we represent sued the DOB last month.

The CDCA generally requires licenses for companies that engage "in this Commonwealth" in making loans at rates in excess of 6 percent per annum. Based on the plain language of the CDCA, the DOB has opined for at least 20 years that out-of-state lenders – those without employees or a physical presence in Pennsylvania – do not need to be licensed under the CDCA.

However, on July 26, 2008, the DOB announced a "change in policy" and advised that, effective February 1, 2009, out-of-state lenders must be licensed under the CDCA or cease lending to Pennsylvania residents. The notice announcing this change in policy did not address the language of the CDCA or provide any legal rationale for the DOB's new position. An affected out-of-state lender that we represent sued the DOB last month in the Pennsylvania Commonwealth Court, seeking an injunction against implementation or enforcement of the new policy on the grounds that it: (1) conflicts with the plain language of the CDCA; (2) amounts to an improperly adopted regulation; and (3) runs afoul of the Commerce Clause.

Following a hearing on the application for a preliminary injunction, the court suggested that the legal issues raised were so important that a final en banc decision of the Commonwealth Court would be warranted. The judge encouraged the parties to resolve the matter and avoid the need for a preliminary injunction decision in advance of an en bancdecision. 

The lender agreed to a stay of the preliminary injunction application, and the court scheduled an April 1, 2009, en banc hearing on a motion for a final injunction. In return, the DOB formally represented that it "has no intent to pursue a retroactive financial remedy" with respect to loans made before the date of the en bancdecision by out-of-state lenders who were lending to Pennsylvania residents as of July 26, 2008. As a result, such lenders can continue making loans to Pennsylvania residents, without risking DOB enforcement proceedings, unless and until the Commonwealth Court subsequently rules in favor of the DOB in this case. Such lenders need not worry that the DOB will take action against them for loans made before the en banc decision, likely to be issued during or after summer 2009.

Ballard lawyers handling the case are Alan S. Kaplinsky, Jeremy T. Rosenblum, and Raymond A. Quaglia.

Internet lending implicates subtle Commerce Clause and conflict of law issues. Ballard Spahr's Consumer Financial Services Group regularly counsels Internet and other lenders regarding these issues and other laws affecting their businesses. We also regularly represent lenders in litigation with regulatory authorities and private parties, including plaintiffs attempting to pursue class action lawsuits. For a copy of any of the pleadings in the CDCA litigation or further information, please contact Alan S. Kaplinsky, 215.864.8544 or kaplinsky@ballardspahr.com; Jeremy T. Rosenblum, 215.864.8505 or rosenblum@ballardspahr.com; or Barbara S. Mishkin, 215.864.8528 or mishkinb@ballardspahr.com.


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