Lenders who have no physical presence in the State of Minnesota but make loans to its residents and in-state lenders using arbitration need to attend to a state law that takes effect August 1, 2009. At issue are "consumer short-term loans," loans or advances on a credit limit up to $1,000 that require a minimum payment within 60 days of loan origination or credit advance of more than 25 percent of the principal.

Two provisions of the new law merit special mention:

  • It prohibits choice of law provisions purporting to apply non-Minnesota law to short-term loan contracts. The effect of this prohibition is to sweep within the coverage of Minnesota law lenders who have no physical presence in the state but make consumer short-term loans to its residents. This would include notification requirements and fee and charge limitations under the Minnesota Small Loan Act (SLA).  Minnesota law provides for the chartering of industrial loan and thrift companies (ILTCs) and gives ILTCs better interest and fee authority regarding consumer short-term loans than SLA lenders. Of course, an existing out-of-state company cannot obtain a new charter as an ILTC and thus cannot charge the same interest and fees as an ILTC. As a result, we believe the new regime discriminates against out-of-state lenders operating in interstate commerce and therefore raises Commerce Clause issues. Nevertheless, lenders desiring to comply with the statute must complete the SLA notification process before making any loans on or after August 1, 2009.

  • Where a lender makes a consumer short-term loan, the new law purports to prohibit it from contracting to limit class actions for (1) violating Minnesota debt collection laws, (2) making loans without a required license, or (3) making loans at interest rates, fees, charges, or loan amounts in excess of those permitted for SLA lenders or ILTCs, as the case may be. The statute contains draconian penalties and a private right of action for violations, including forfeiture of all principal and interest on the loans and statutory damages up to $1,000 per violation (without any aggregate cap in class actions). Class action waivers are typically contained in arbitration agreements and are rarely standalone provisions. Accordingly, we believe that this aspect of the Minnesota law is vulnerable to attack under the Federal Arbitration Act. That being said, lenders desiring to comply with the statute need to revise their arbitration agreements before making any loans on or after August 1, 2009.

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documentation of new consumer financial services products, its significant experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs). For more information, please contact Alan S. Kaplinsky, 215.864.8544 or kaplinsky@ballardspahr.com; Jeremy T. Rosenblum, 215.864.8505 or rosenblum@ballardspahr.com; John L. Culhane, Jr., 215.864.8535 or culhane@ballardspahr.com; Barbara S. Mishkin, 215.864.8528 or mishkinb@ballardspahr.com; or Mark J. Furletti, 215.864.8138 or furlettim@ballardspahr.com.

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