Choice of law clauses in online credit with consumers


Courts and regulators have carefully scrutinized Internet lending, beginning with the 2008 U.S. Court of Appeal ruling in the Quik Payday Inc. v. Stork. The court found that Quik Payday had to obtain a license to offer payday loans to Kansas residents, even though the transactions were offered under Utah law. In the wake of the Quik Payday decision, the Consumer Financial Protection Bureau and various government agencies have taken significant action in relation to internet lending, particularly those with a relatively short term or with a relatively high annual interest rate, such as: B. Payday Loans. Often times, these lawsuits depend on whether the internet lender’s choice of law was appropriate or whether the parties chose a particular state law that bypasses consumer financial protection. Small dollar internet lenders operate on one of the following models: state suffrage, banking partnerships, and tribal partnerships. Internet lenders and consumers alike should be aware of the risks associated with each of these models.


As seen in the Quik Payday case, many internet lenders choose to act by their home state laws and apply them through a choice of law clause to all loan agreements, whether it is an in-state or out-of-state transaction acts consumers. In this model, the lender does not generally work with an entity such as a bank or a tribe.

Instead, the lender establishes a place of business in a particular state and offers loan agreements that allow that state to regulate the terms of the loan, although consumers often reside in other states.

In several lawsuits, private plaintiffs and regulators have challenged the enforceability of clauses that choose the law of the lender’s home state as the law governing the terms of the contract.

In Swanson v. Integrity Advance, a case strikingly similar to the Quik Payday case, the Minnesota Supreme Court ruled that Minnesota payday loan laws, not Delaware law, apply to payday loans made by a Delaware online lender.

The court justified its decision on grounds of federal constitutional law. Although the transactions were completed in Delaware, the court found that the lender Integrity had interfered with the Minnesota flow of trade by contacting Minnesota residents and transferring funds to bank accounts there.

The Integrity Case is evidence that lenders may not successfully argue that online transactions do not reach the consumer’s home. Instead, when deciding whether to enforce a choice of law clause in a consumer loan agreement, the courts will consider a variety of factors, including whether the lender targeted foreign consumers with advertising and communications. Courts also often refuse choice of law clauses on the grounds that the application of foreign law would violate public order.

Community and regional banks, as well as other regulated financial institutions, welcome these efforts by regulators to ensure that both regulated and their regulators have a clear understanding of the appropriate role of guidance in supervision.

As the above cases show, Internet lenders can be faced with compelling arguments that they have infiltrated other states’ trade flows. They will find it difficult to overcome these arguments.


Bank partnerships are also the subject of ongoing regulatory interest. In the banking partnership model, banks offer loans in conjunction with a non-lender who acts as a sales and service point. The bank usually sets the actuarial criteria and finances the loans.

The partner company carries out marketing and service functions and, in the case of some partnerships, acquires the right to collect income from the loans after they are granted.

Opponents of the banking partnership model argue that the non-banks are the real lenders and simply use the bank’s statutes to bypass government interest rate caps. In some cases, these opponents have succeeded in questioning the validity of the banking partnership model.

In the Meade v. Avant of Colorado LLC case, the administrator of the Colorado Uniform Consumer Credit Code brought an enforcement action alleging that Avant, an unaffiliated assignee of loans from a state-insured bank, violated the restrictions on Colorado borrowing fees have violated.

Guidelines may contain examples of practices that authorities believe are generally consistent with safety and reliability standards or other applicable laws and regulations, including those designed to protect consumers.

The US District Court for the District of Colorado ruled that Avant was the true lender, arguing that Avant was the assignee of the loans and “only had a contractual relationship with WebBank” and that WebBank “only had an ephemeral role in the Lending “played” before “sell immediately[ing] them, and it [was] Avant, which is usually direct[ed] the fees and activities that allegedly violate[d] State Law.”

In the Pennsylvania v. Think Finance Inc. case, the US District Court for the Eastern District of Pennsylvania ruled that in a transaction as the Attorney General of Pennsylvania Think Finance Inc with a foreign bank under a “Rent a Bank” program.

The cases Avant and Think Finance illustrate the importance of meaningful banking activities in a banking partnership transaction. It is important that the programs and related materials make it clear to consumers, regulators, and the courts that they see the banks fully involved in the transaction. It must be clear that the relationships are more than fleeting.

Of course, it needs to be made clear that the bank is doing more than just providing funding. Courts and regulators will not allow transactions if non-banking service providers are found to guide the bank’s actions and decisions. A critical question is whether the bank will retain more than a nominal stake in the transactions after its inception.


Another internet lending model is called a tribal model, in which an entity works with a tribe to offer credit. The tribe is the lender, and the affiliate generally helps market and service the transactions.

Those who use this model claim that the law of the tribe, not the law of the consumer’s state of residence, applies to the transaction. Federal and state supervisory authorities as well as attorneys general are particularly skeptical of this model.

For example, in 2015 North Carolina sued an online consumer lender and its agents who were offering transactions under the laws of the Cheyenne River Sioux tribe. The state alleged the agreements violated North Carolina usury law.7 The North Carolina Supreme Court ruled that North Carolina law could apply since the state’s usury law provides for loans made to North Carolina residents regardless des in the contract.

In 2016, the Georgia Supreme Court similarly dismissed Western Sky Financial LLC’s argument that Georgia law did not apply to their small dollar loans because the contracts were made on a reservation. The court ruled in favor of the Georgia Attorney General, ruling that Georgia law was applicable.

In November 2017, CFPB sued Think Finance LLC for its alleged involvement in the creation, servicing and collection of online credit transactions. The CFPB alleged that the transactions violated state law and were void despite having a contractual choice of law clause intended to establish tribal law as the governing law.10 At the time of publication, the lawsuit is pending.

Of the three models outlined, the tribal model appears to be the most susceptible to review. While in many cases state regulators and courts do not have the power to regulate sovereign tribal governments, that does not mean that tribal consumer credits, often with the assistance of non-tribal partners, are deemed enforceable (or even lawful). by state authorities.

In some situations, auditors can refer to supervisory guidance to provide examples of safe and sound behavior.

While tribal governments can benefit from immunities, those who serve the tribe have a much harder time winning the argument that they are similarly immune. In addition, state authority over tribes, especially for the CFPB, is a pervasive reality.


Many people are watching closely how the CFPB, under Mick Mulvaney (and possibly agency nominee Kathy Kraninger), will approach internet lending and the various models outlined above, particularly tribal lending.

If the CFPB takes a less active approach to regulating internet lending, we may see more activity by state regulators and attorneys general trying to protect their consumers from overseas lenders. However, given the action against think finance in late 2017, the CFPB does not appear to be backing down on its stance on the tribal model.

Since both state and state control are unlikely to wane, internet lenders should carefully weigh the risks associated with the three models discussed above in structuring their business. The best way for them to avoid consumer and regulatory claims is to follow federal laws, as well as country-specific credit, license, and consumer protection requirements.

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