Out-of-State Customers Bring Increased Risk.(OpEd)

Byline: Laura Marquez-Garrett, Attorney, Foster Pepper PLLC

As state regulators push to expand the reach of their consumer protection laws, financial service providers who do business with customers from other states face increasing risk. This holds true even when a transaction actually takes place in the state where the company is based.

Consider the following scenarios:

Example one - Resident of State A travels to State B and gets a consumer loan. Should the company providing the loan be subject to regulation in State A, even though the transaction took place in State B?

Example two - Resident of State A obtains consumer financial services from a company in State B via the Internet. The company is licensed by State B to provide the services, but is not licensed by State A. Should State A be allowed to regulate the transaction according to its own laws?

For financial service providers targeted by regulators from other states, there are several key issues to bear in mind.

First, don't assume that another state can take legal action. Regulators are quick to assert personal jurisdiction over out-of-state entities and their principals, but this type of jurisdiction is not a creature of state statutes. There is a due process requirement in the Fourteenth Amendment.

Similarly, even if a case for jurisdiction can be made against a company, don't assume that the same holds true for its owners, shareholders or employees. There is ample authority for the proposition that jurisdiction over an individual cannot be based solely on jurisdiction over a company.

In cases where a consumer physically travels to another state, a company and its principals may have particularly strong jurisdiction defenses.

Second, don't assume that subject matter jurisdiction exists. Does the statute being cited authorize out-of-state regulation? Or, instead, is it replete with references to state courts and certain location requirements, such that interpreting it to apply to out-of-state entities might render the statute, as a whole, nonsensical?

Washington state regulators, for example, sometimes rely on the Check Cashers and Sellers Act. Yet many of its provisions appear to contain explicit and implicit in-state limitations.

Some states have taken steps to address potential shortcomings in their laws, which, in current form, are often incapable of addressing the realities of multistate Internet transactions. In the absence of recent and relevant amendments, state statutes should be scrutinized closely.

Third, consider whether constitutional concerns regarding the regulation of interstate commerce are implicated. These issues were recently considered by the Tenth Circuit in Quik Payday Inc. v. Stork and the Seventh Circuit in Midwest Title Loans v. Mills.

Both cases involved amendments to the state Uniform Consumer Credit Codes. The amendments purported to expand the ability of state regulators to reach lenders in other states by redefining what it means for a loan to be made "in" a state.

In the case of Quik Payday, the Tenth Circuit determined that Kansas regulators could require companies transacting with state residents over the Internet to obtain a Kansas license. But the court expressly declined to address the issue of ongoing regulation, including interest rates, repayment schedules, and loan renewals.

With Midwest Title, the Seventh Circuit determined that state laws could not be imposed on commerce occurring wholly outside of Indiana.

Be careful about drawing any conclusions, though. While useful for framing potential concerns, both decisions were fact-specific and there is still considerable room for debate.

These are just some of the first lines of defense to consider when regulators cross state boundaries. Early consideration is critical to enable strong bargaining positions from the start.

Lastly, and as regulators are all too well aware, defending against enforcement attempts-regardless of the strength of those defenses-can result in costs exceeding settlement. Accordingly, open dialogue is key to a cost-efficient resolution.