For the September 24, 2006 issue of the Anchorage Journal of Commerce

Possible speed bumps for loans offered on the internet?

If you are one of the growing numbers of internet users, you must be aware of the tremendous increase in advertising, offering and sale of goods and services on it.  This trend has even entered the staid area of financial services, traditionally reserved to banks and other financial institutions within a given state or other jurisdiction.

The website or email coming to you may emanate from a business located across town or outside of Alaska.  How are these missives treated under Alaska law?  While financial services can cover a broad spectrum, let's limit our discussion to lending services.

Today, most businesses have websites.  An important question to ask before hawking your wares on the net is whether one or more specific jurisdictions might impose prerequisites on such activity.  A prerequisite might be as limited as a business license or as comprehensive as registration or licensing under a specific state financial institution statute.

The regulation may also take the form of taxation on business conducted in one state or across state boundaries via the internet.  While tax issues are always important to a business, let's confine our further discussion to non-tax issues. Let's also focus on requirements under Alaska law.

As in many states, a good portion of Alaska law dealing with financial services was in place long before the recent expansion of the financial service industry into the internet.  Furthermore, there are no Alaska rules or regulations interpreting the applicability of those laws specifically to the internet.

In this context, be alert to the regulator's interpretation of that state law.  Otherwise you may, as a provider of those services, find yourself in an administrative dispute or in court defending yourself against claims of violation of law. 

Loans may be provided under Alaska law through a number of entities including financial institutions and other organizations.  Depending upon the nature of the loan, there may be little or no state regulation.  For example, a mortgage lender may, under limited conditions, offer loans via the internet without being a financial institution specifically licensed under Alaska law. 

Financial institutions are regulated through separate, specific Alaska statutes.  Where the provider of financial services is a financial institution, specific regulation of the content of the website may apply. 

Financial institutions include state-chartered banks, savings banks, credit unions and trust companies.  They also include state-licensed small loan companies, premium finance companies and, most recently, deferred deposit advance companies. 

Financial institutions offering depository services in Alaska (banks, savings banks, credit unions and trust companies accepting deposits) are required to maintain insurance of accounts through an appropriate federal deposit insurance agency.  As a result, these institutions are subject to significant federal regulation which may dictate the manner in which the institutions offer loans, whether through the internet or otherwise.

State-chartered organizations are regulated directly by the state. Where the organization accepts deposits, that regulation is significantly influenced by compliance with the federal deposit insurance regulation.  However, much, but not all, of the activities of financial institutions organized under federal law (national banks, and federally-chartered savings banks, credit unions and trust companies) are subject to regulation directly by the federal government.

What remains of the list of financial institutions are those entities directly and solely regulated by the state.  These include non-depository trust companies, small loan companies, premium finance companies, and deferred deposit advance companies.

A provider of consumer loans (each limited to up to $25,000) must, with limited exception, be licensed under Alaska law as a small loan company to make such loans. 

Under a separate Alaska statute, with limited exception, a premium finance company must be licensed to enter into premium finance agreements on insurance sold in, or risks located in, Alaska.  This requirement applies even though the company may have no physical office in the state.

Under yet another separate Alaska statute, a licensed deferred deposit advance company may make a loan to a customer based upon an anticipated disbursement to the customer's personal account.

The focus of non-depository trust companies is on providing trust services.  These services consist primarily of trust administration, custodial and investment services.  They do not normally include making loans to customers. 

With the exception of laws pertaining to deposit advance companies, Alaska statutes for state-chartered or licensed financial institutions are silent specifically as to offering of financial services from, or into, Alaska via the internet.  That is, they do not specifically address or identify special rules pertaining to advertising or offers of such services made via email or on internet websites. 

In the case of deferred deposit advance companies, the Alaska statute specifically requires that a person, including a person doing business from outside of Alaska, may not engage in the business of making, or offering to make, deferred deposit advances in Alaska without first being licensed under that statute. Under that statute, a separate license is needed for each physical location or internet website from which business is conducted.

State-chartered or otherwise licensed financial institutions in Alaska are regulated through the Department of Commerce, Community and Economic Development. The department, in administering these statutes, may consider use of electronic communication as subject to state regulation regarding advertising by such institutions.

In this context, the department may require licensing of the provider and may impose other requirements, including ones on advertising and the means of offering of loans as would be required for more traditional means of providing these services, e.g., through offices located in the state.  The specific requirements depend upon the financial institution statute and the manner in which it is administered by the department.

Loans may also be offered through persons traditionally associated with the securities industry, e.g., margin account loans based upon the value of securities in a customer's portfolio.  In this instance, the services are subject to state and federal securities law and regulation.  Depending upon the nature of the provider, state and federal financial institution law and regulation may also apply.  Carefully consider these requirements in the event your transaction involves such loans.

If you contemplate offering financial services in Alaska via the internet or otherwise through a more traditional office located in Alaska, first check the state financial institution statutes to see whether they apply.  If one of them does apply, carefully review it to ensure compliance with its licensing and other requirements before advertising or offering those services to the public. 

Likewise, as a prudent prospective consumer of such services, inquire of the provider as to that compliance with state law.  For example, ask for a copy of the state license or verification of exemption from licensing under Alaska law.  If you are not satisfied with the response, contact the department to inquire as to the status of the provider under state law.  The department provides further information on its administration of the financial institution statutes at http://www.state.ak.us/.

The Internet is a powerful means of communication and source of information.  It has more recently become a growing means of advertising and providing of financial services.  While the internet has thus far experienced limited regulation, it is not immuned from it.  Happy surfing on the net!

*Mr. Brecht is an attorney in private practice and shareholder with the law firm of Wohlforth, Johnson, Brecht, Cartledge & Brooking, A Professional Corporation, with offices in Anchorage, Alaska.  Mr. Brecht's concentration of practice is in state and federal securities law and corporate and finance law.  The content of this article was not prepared as, and must not be construed as, legal or investment advice to anyone.  He may be reached at jbrecht@akatty.com.

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