Perspective: Internet conduct that crosses the state line?

Illinois has just ordered Global Payday Loan to stop issuing loans to state residents. It also has fined the company $234,000 for charging excessive interests rates. But the decision raises the broader question of whether states should regulate Internet conduct that crosses state lines.

The investigation began after a complaint from someone who borrowed $300. The loan in question fell under an Illinois provision that capped annual finance charges at 36 percent.

State investigators found serious problems with the transaction. For one thing, the loan was written with a six-day term, which did not give the borrower sufficient time to repay the loan. Furthermore, the fees on the loan exceeded the $15.50 per $100 allowed under Illinois law.

In addition, the annual percentage rate on the loan interest rate came to 2,190 percent, as the borrower was required to repay the $300 loan plus a $90 finance charge just six days after the loan had been originated. According to the Illinois agency charged with loan oversight, Global Payday then continued to violate the borrower's rights by sending her e-mail warnings and making phone calls asserting that her account was delinquent and demanding payment.

The subsequent fine cost Global Payday $234,000. All well and good, right? Not necessarily. According to the state's notice of order, Global Payday is located in Jenkstown, Penn., and Salt Lake City--not in Illinois. By offering loans over the Internet, the company is making such loan opportunities available to potential borrowers in all of the states, not just Illinois.

While Illinois might want to flex its muscles to protect its citizens in regulating payday loans in certain ways, other states may want to impose different legal requirements. In so doing, a company like Global Payday that seeks to engage in Internet business across state lines might be nagged by uncertainty when it comes to figuring out cross-border legal compliance.

Constitutional arguments could be made that state efforts to regulate e-business that, in part, comes within their borders improperly burdens interstate commerce. The argument could be made that only the federal government has authority uniformly to regulate. Such arguments have been made in other contexts. But there remains much uncertainty. Coming months--and years--will likely determine how much authority states truly will have when it comes to Internet regulation.

Biography
Eric J. Sinrod is a partner in the San Francisco office of Duane Morris. His focus includes information technology and intellectual-property disputes. To receive his weekly columns, send an e-mail to [e-mail] with "Subscribe" in the subject line. This column is prepared and published for informational purposes only, and it should not be construed as legal advice. The views expressed in this column are those of the author and do not necessarily reflect the views of the author's law firm or its individual partners.

More Perspectives

[ZeroHero0H]

Um, lets control our outrage

Lets focus outrage on the scamming payday loan company that is offering such incredibly outrageous and usurious terms to people who don't understand them, ok?

Illinois is quite right to crack down on internet scammers, whether or not they happen to be a "loan company" or not. If you had to set up brick & mortar in order to offer "payday loan services" you'd clearly come under state jurisdiction.

The author seems to be an attorney retained to defend this sort of outrageous behavior and uphold the almighty scambuck without regard to common sense.

[Alocer]

State regulation

Insurance companies and real estate agencies are two examples of businesses that do business in multiple states and have to follow regulations that vary between each state. Why should legal loan sharks be exempt from state regulation where they do business no matter where they are headquartered?

[simple42]

Much more than "Internet" iinvolved

This seems like making something simple appear
complex by wrapping it in the guise of "Internet".
Actual money changed hands. Harassing phone calls
were make. How did the lender expect to collect
without using Illinois courts? If the advertisement
of lending had been mailed, instead of posted on a
web page, would Illinois have jurisdiction? Certainly.

[Renegade Knight]

Internet and State Lines have nothing in common.

A company can be on the internet and limit it's service to the state they are in. Until the internet allows users to be "invisible" outside the region they wish to operate in people in Mongolia will be able to see a business in Chicago even if the one in Chicago only want to work in IL.

That's different than jacking someone on a loan and breaking most states laws on usury.

[dburr13]

The internet is not a shield for scammers

Other out of state businesses have to observe Illinois state law when doing business in this state...Why should the internet be a shield for out of state businesses?...A scam is a scam...Whether brought into your life by a door to door salesman or the internet...In my opinion the fine was way too low...

[247mark]

Not that simple

How does using the mail confer jurisdiction to Illinois? I believe the mail is federal and Illinois is not a federal government. The reason that these advance payday companies work without regulations similar to, say, the insurance industry, is because the payday companies are still small and use lobbying groups to convince Congress of this. Additionally, these services prey on those who can least afford to do something about it - the poor and uneducated. Government, like justice, works for those who have the money and influence. Not advocating this position, just making an observation here. Insurance is huge - you need it for just about everything now and, hence, it is regulated. As for zerohero, Eric Sinrod is an attorney but I hardly think the article reads as though he is advocating outrageous behavior. This is an interesting intersection of technology and law and the answers, from a legal perspective, are not as simple as doing something bad and paying a huge fine.

[MSSlayer]

Payday loans should be illegal

They prey on the ignorant and desperate and it is too easy to the person to get into a cycle of dependence on payday loans because of the outrageous terms of a typical payday loan.

The only difference between a payday loan company and a loan shark is that the loan shark can't use the courts when someone doesn't pay up.

[MSSlayer]

further

There should be a cap on any type of loan, say 15%.

It will kill off the payday loan scams as well as the credit card scams that take advantage of people with bad credit by offering them credit cards at terrible rates. I did a little research on them and found offers of 25% interest, a $150 "set up fee", and a $100 dollar annual fee. All on cards with a typical limit of $300-$500. These fees seems to get charged on the card, and of course the victim is paying interest on the charges.

All this is set up to make the person stay in poverty, and usually ends up making them worse financially.

Yeah, the person who falls for this crap is also responsible, blah blah blah, but these companies are nothing more then con men. We don't excuse a con man who just pilfered all the money from an old lady because the lady is responsible for her actions. No, the scumbag is thrown in jail.

That is where people who run these scam businesses should be rotting.

[Too Old For IT]

Payday Loans

Payday loans came into being because the banks, S&Ls, credit unions and store-front finance companies left the small borrower behind.

Go into your local bank and try to borrow $100 or so without putting it on your credit card.

[system001]

quite simple

i live in washington and rather the business is on the internet or just a brick and morter company outside of washington the transaction leggally took place where the consumer lives not where the business is located. in other words if newegg in california breaks a washington state law while doing business with me they are responsible for answering to my state for trhe law they broke. i agree with this simply because my state has to have some way to protect me as it's citizen. remove these consumer protects just because a business is not in that state and you are asking for internet fraud to go through the roof.

[gr8bluemarble]

What happened to Contract Law?

Isn't it the law that a contract is under the jurisdiction of the state in which it was signed?

In this case, it should be the state in which the consumer resides as they were on their computer at the time that the transaction occurred. Internet security uses IP addresses to track an individual to a physical location, in this case Illinois, and they are prosecute accordingly.

Most financial businesses are responsible to honor the laws of the state in which the transaction occurs hence the disclaimers on credit cards.

I say nail the scumbags and put them out of business. It's fraud and an average "Joe" would end up in prison for that type of behavior. Poverty should be treated as an illness instead of victimized by big business.

United States of America where only those with money can afford all their rights.

[MSSlayer]

technically

Unless the loan company is completely stupid the loan actually took place on the server. The customers computer was used to generate the application and display the results.