State “long-arm statutes” have long held that states have jurisdiction over businesses that enter their states to conduct business, regardless of where the business is actually located. In Zippo Manufacturing v. ZippoDot Com, Federal court set a sliding scale to determine whether a business located in a state outside of the consumer’s state can be held to the laws of the consumer’s state.  If a business merely advertises or provides information, or the information provided is clearly intended for a specific audience in a particular state, the business does not come under the jurisdiction of a consumer who solely views the advertisement or information in another state. 

At the other end of the scale, if a business solicits business, accepts business, and continues to transact business with a consumer in another state, the court held that, in fact, the “electronic” business is conducting business in the consumer’s state, and therefore, is subject to the laws and courts of that state.

In an Internet gambling case, an injured Texas consumer sued a California-based gaming website under Texas law. The website argued that it was not based in Texas, its servers were in California, and its customers signed a choice of law agreement stating that they would abide by California law.  The US District court held that the gaming site was indeed doing business in Texas and was, regardless of the contract choice of law, covered by Texas law, permitting Texas consumers to sue the California gaming site under Texas law in Texas state court.

States have broad power to protect citizens where federal law does not directly conflict. The National Consumer Law Center Cost of Credit manual notes that courts generally find that web sites by which a lender conducts business with residents of the state in question, such as entering into contracts and exchanging files, meets the minimum contacts test to give the consumer’s state jurisdiction in e-commerce cases. 

States are just beginning to come to grips with regulatory issues resulting from loans made to state residents by out-of-state lenders via the Internet.  Iowa’s Uniform Consumer Credit Code prohibits waiver of rights, such as choice of law provisions in contracts.  Regulators hold that interactive Internet loans made with an Iowa consumer by an out-of-state lender are subject to Iowa credit laws.

Other states are adapting credit laws to cover loans made via the Internet. The Colorado Uniform Consumer Credit Code was amended in 2000 to specifically cover consumer loans made over the Internet, if the consumer is physically in the state with the transaction is made.  Maine’s lending jurisdiction law was amended to deal with Internet communications and now reads, “This Act…applies to…transactions … if … (t)he creditor, wherever located, induces the consumer … to enter into the transaction … by … mail, telephone or electronic mail solicitation…” 

The Virginia Bureau of Financial Institutions regulation implementing the payday loan law prohibits loans secured by electronic access to the borrower’s bank account. The only security for the loan in Virginia is the paper check.  Since all Internet payday loans employ ACH or electronic fund transfer to deliver loans, Virginia regulators view internet lending as prohibited although no enforcement has been attempted. Utah requires Internet payday lenders to comply with state requirements to disclose a complete schedule of interest and fees charged for a loan, a phone number the consumer can call to file a complaint with Utah regulators, and a list of states where the check casher is registered or authorized to offer deferred deposit loans through the Internet or other electronic means.

Some states require out-of-state lenders to get a state license.  New Mexico requires non-resident lenders to be licensed to make loans to consumers. Oklahoma’s payday loan law was amended in 2004 to expressly apply to loans made via the Internet, although state regulators already thought they had that authority. The North Carolina usury law applies to out-of-state lenders if the borrower accepts the loan offer in North Carolina even if the solicitation comes from outside the state.

The NC Consumer Finance Act provides that loans made from outside the state to a North Carolina borrower are not enforceable in North Carolina if the rates exceed the rates permitted under the Consumer Finance Act. Non-bank internet lenders would be subject to state law in North Carolina. Also, Washington law requires that state usury limits apply to loans made to Washington residents from outside the state. “Whenever a loan or forbearance is made outside Washington state to a person then residing in this state the usury laws found in chapter 19.52 RCW, as now or hereafter amended, shall be applicable in all courts of this state to the same extent such usury laws would be applicable if the loan or forbearance was made in this state.”