Payday Lenders Use Tribal Sovereignty to Circumvent State Laws

by ETF Base on August 20, 2011

Since the 1990s, payday lenders have faced increasingly strict state legislation. While most reputable lenders continue to abide by state law, several unscrupulous online payday lenders have found a way to bypass these regulations. The lenders in question incorporate their businesses on Native American reservations, claiming them as “tribal enterprises.”

This business model rests on two centuries of legal precedent, in which courts decided that state governments have little authority over tribes. The online payday lenders negotiate stipends for the chief or tribe in exchange for tribal association. This allows deceitful lenders to skirt state laws, such as interest rate restrictions, while the tribes earn some much needed revenue.

States first became aware of the tribal lending model while investigating unlicensed operations offering loans over the Internet. In 2005, Colorado’s attorney general forced two online payday lenders to produce documents verifying their credibility. After months of silence, representatives from two different Indian tribes claimed that they actually owned the businesses. Similar legal fights have erupted in other states, including California, New Mexico, and West Virginia.

Defense of the Tribal Lending Model

Native American tribes argue that the tribal lending model provides much needed economic support to a culture that has been largely forgotten by the government. They maintain that tribes have been, “stripped of their economic vitality and forced to relocate to remote wastelands[2],” and that profits from payday lending help pay for, “tribal law enforcement, poverty assistance, housing, nutrition, preschool, elder care programs, school supplies, and scholarships[2].”

Criticism of the Tribal Lending Model

Critics of the tribal lending model argue that these online lenders maintain a very tenuous connection to Indian reservations, describing the practice as “rent-a-reservation.” Most of the lending websites reveal nothing about their owners, and many tribes fail to provide addresses for these controversial businesses. Indeed, most tribe members have no knowledge of the legal battles being fought over this business model, or even that such a model exists.

The California Department of Corporations supported its case against tribal lending with a statement from William James, a former employee of a tribal lender. The whistleblower claimed his former employer belonged to a web of up to 500 companies that were all headquartered in an office complex in Overland Park, Kansas. The company banned employees from disclosing their location and kept the building extremely secure. According to James, other than mailboxes on Indian land, there was nothing to suggest the web companies were owned or run by Native American tribes.

Critics also question the timing of incorporation. According to Colorado authorities, some of the tribes didn’t incorporate tribal enterprises or enact payday loan ordinances until after the state took enforcement actions against the lenders.

In addition, many of these online lenders provide inferior products when compared to the rest of the industry. Because many tribal lender websites don’t give cost details up front, customers often complain that prices are steeper than anticipated. When borrowers don’t have enough money in their checking accounts to pay back the loans, many tribal lenders automatically rollover their loans, causing additional fees and interest costs. And when the loans go into collections, tribal lenders often harass for repayment. For these and many other reasons, most tribal lenders receive low scores from the Better Business Bureau.

The payday industry itself has sided with the states. According D. Lynn DeVault, board chairwoman of the Community Financial Services Association of America:

[Although the] U.S. government has granted sovereign immunity to tribes that shield them from payday lending regulations, [CFSA member companies] will continue to hold themselves accountable to states and will not be involved in this practice. Our best practices require that all our member companies be licensed in the state where the customer resides and that they comply with all applicable state laws. Partnering with a Native American tribe to avoid state licensing requirements for short-term lending defies CFSA best practices and would lead to the automatic expulsion of a company in violation[1].

The Dodd-Frank Act & the Consumer Financial Protection Bureau

Last summer, Congress passed broad financial reform, creating the Consumer Financial Protection Bureau (CFPB) and empowering them to regulate payday lenders. The CFPB’s mission is, “to protect consumers by promoting transparency and consumer choice and preventing abusive and deceptive practices[3].” According to the U.S. Treasury website:

The Wall Street Reform and Consumer Protection Act establishes, for the first time, robust federal supervision and oversight over larger alternative financial service companies such as check cashers and payday lenders, including on reservations. The CFPB will be able to combat abusive practices that harm consumers, helping families avoid hidden fees and keep more money in their pocketbooks[3].

Many experts agree that while the new bureau will have rulemaking authority over tribal payday lenders, efforts to regulate tribal payday lenders will likely spark drawn-out court battles involving the complexities of tribal immunity. However, others contend that tribal lending practices are already illegal under current laws; the legal system just hasn’t caught up to them yet. This sentiment is voiced in the following quote from Uriah King, Vice President of State Policy for the Center for Responsible Lending:

If it is really the tribe, if the tribe itself is really making the loan, if the shop is there and they take the bulk of the risk, if they underwrite the loan and collect and service the loan, then there is little states can do. If it is just a ruse, and a bogus relationship with this Internet lender or whoever the real lender is and they are not a real part of the tribe, so to speak, then state law applies. I think there is going to be serious litigation around this and there are going to be major settlements before it is over. This is going to be a losing proposition for the people invested in this[1].

Works Cited:

[1] Mont, Joe. “Tribal-Land Payday Loans Spark Reservations – TheStreet.” Stock Market Today – Financial News, Quotes and Analysis – TheStreet. The Street, 06 July 2011. Web. 12 July 2011. .

[2] Hudson, Michael, and David Heath. “Fights over Tribal Payday Lenders Show Challenges of Financial Reform | IWatch News.” IWatch News | Investigation. Impact. Integrity.IWatch News, 07 Feb. 2011. Web. 12 July 2011. .

[3] “The Dodd-Frank Wall Street Reform and Consumer Protection Act Benefits Native Americans.” U.S. Department of the Treasury. Web. 12 July 2011. .

About the Author

Check N Go, the fourth largest consumer financial service institution in the United States, offers installment loans, check cashing, payday loans, and cash advance loans as part of their commitment to ethical and responsible lending. Check N Go has consistently set high standards for their payday loan and installment loan services to ensure that their customers continue to have options available for whatever financial circumstances come their way.

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