Research by Paige Marta Skiba was cited in Midwest Title Loans Inc. v. David H. Mills, Director of the Indiana Department of Financial Institutions, a case decided by Judges Richard Posner and Joel M. Flaum of the U.S. Court of Appeals for the Seventh Circuit and Judge Samuel Der-Yeghiayan of the U.S. District Court for the Northern District of Illinois (sitting by designation).
Midwest Title, a car title lender with operations in Illinois, sought to stop Indiana from applying its interest-rate and fee limitations to loans made by Midwest’s Illinois-based lending operations to Indiana residents who crossed the state border seeking loans, claiming that Indiana’s attempt to enforce its restrictions on Illinois lenders violated the federal Commerce clause. Illinois permits car title lenders to charge interest rates that are more than 10 times higher than the maximum rates permitted under Indiana law, and more than 2,000 loans had been issued to Indiana residents by Illinois loan outlets.
The district court granted a permanent injunction prohibiting Indiana from applying its restrictions to the Illinois lenders, and the State of Indiana appealed that decision.
In its opinion affirming the district court’s decision, the Seventh Circuit panel summarized a scholarly debate on whether allowing unsophisticated consumers to use a car title or future paycheck as collateral for high interest loans benefits or harms the consumers. “Payday Loans, Uncertainty, and Discounting: Explaining Patters of Borrowing, Repayment, and Default,” an article co-authored by Skiba and Jeremy Tobacman of the Wharton School of Business, was cited as indicating that such lenders prey on consumers who aren’t savvy enough to understand that these loans offer very unfavorable terms and that other alternatives that offer lower interest rates and fees are available. Other research indicates that such lenders meet a need by enabling people who cannot borrow from a bank because they have poor credit to take out loans to meet urgent financial needs.
Although the decision acknowledged the academic debate over the benefits and drawback of payday and title loans, the panel concluded that “we do not have to take sides.” The Seventh Circuit Court affirmed the lower court’s decision based on its conclusion that Indiana could not legally prohibit its citizens from going to Illinois to borrow from car title lenders there at terms legal in Illinois, nor could Indiana require lenders with no operations located in Indiana to adhere to its restrictions on loan terms and interest rates.