The Relationship between Indian Tribes and the Payday Lending Industry

Over the past two decades, the short-term, small-dollar credit market landscape has gone through dramatic changes. While the payday loan industry mainly serves customers and generates revenue through storefront operations, the early twenty-first century has witnessed a migration of payday loan providers to the Internet and Tribal Payday lenders have emerged as prominent players in the market.

Tribal Payday Lending: The concept of Sovereign Immunity

Sovereign immunity generally precludes tribally run businesses from state regulations. Some tribes have claimed immunity in state and federal courts on behalf of the payday lending entities that consumer groups accuse of charging usurious interest rates to mainly low-income borrowers. Tribally affiliated payday lenders, due to this claim of immunity, are able to operate Internet-based payday lending businesses in states where the interest rates charged by lenders exceed those permitted by the state or in states where payday lending is banned all together. This immunity is commonly referred to as the “sovereignty model.”

There are more than 560 federally recognized sovereign tribes in the United States, many of which do not benefit from the gaming industry, a proximity to urban centers, or abundant natural resources. For many tribes, geography creates a number of barriers to promoting economic growth. Proponents of tribal payday lending argue that these barriers to economic growth create a need for tribal Internet-based opportunities.

Presently, there are at least eleven federally recognized Native American tribes affiliated with payday lending. A majority of the companies offering payday lending services claim ownership and operation by tribes located in Oklahoma, but numerous tribes from California to Wisconsin participate in the payday lending business.

Issues for the Tribal Payday Lenders

Consumer advocates and some storefront lenders have cautioned that online payday lending can exploit borrowers because these online loans often occur outside of the reach of state regulators. Although some lenders purport to be state-licensed and to comply with state interest rate caps and loan terms, numerous online lenders claim choice of law from states with no rate caps or from foreign countries. Notably, a growing number of online lenders claim to be exempt from state law enforcement as a result of tribal sovereign immunity. Controversy has developed with regards to online payday lending operations that evade state regulations by affiliating with Native American tribes.

The controversy surrounding tribally affiliated payday lending operations is predominately centered on the tribal lenders’ immunity from state regulation and suit. Tribes are entitled to this immunity under the doctrine of tribal sovereign immunity. Tribal businesses may also enjoy the protections of sovereign immunity if they function as an “arm of the tribes.” Critics of tribal payday lending and tribal officials disagree as to the legal status of these operations. Under established Federal Indian Law, the only manner in which to resolve the question of whether tribal payday lenders are entitled to the protections of tribal sovereign immunity is to submit tribal payday lending entities to an arm of the tribe analysis.

Regulatory Pressure

Recently, tribal lenders have drawn some flak from the regulators; in fact the New York’s Department of Financial Services ordered 35 online and tribal lenders to stop offering “illegal payday loans” in New York, saying they violated a state-imposed cap on interest rates charged to consumers. However, the tribes argue that the states have no authority to regulate these tribes in a way that limits their sovereign rights. In addition, the tribes say that any government crackdown on tribal lending companies—by federal or state regulators—would lead to devastating cuts in education, health care and housing on Indian lands. The tribal online lenders generate millions of dollars of income used to fund those core services, all of which have sustained huge cutbacks from sequestration of the federal budget.

Given the widespread tribal protests, on the 21st of August 2013 the U.S. Department of Justice officials assured the tribal leaders that they are not being illegally targeted. This means that the tribal lending business can continue to enjoy sovereign immunity and conduct business as usual in the state.

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Source: American Indian Law Journal