David Lazarus of the LA Times has reported that a growing number of Indian tribes are getting into the payday loan business, seeking to raise revenue for their reservations while helping cash-strapped consumers nationwide. But federal officials suspect that, at least in some cases, tribes are being paid to offer their sovereign immunity to non-Indian payday lenders that are trying to dodge state regulations.
They may now face a crackdown by the federal Consumer Financial Protection Bureau.
"The states have historically been the ones that have regulated and overseen the payday-loan industry," said Tom Feltner, director of financial services for the Consumer Federation of America. "They're the ones that have implemented rules for interest rates or even whether a payday loan can be issued," he said. "The vast majority of these tribal lenders are not complying with state laws."
In California, payday lenders are prohibited from lending more than $300 at a time, and they can't charge more than 15% interest. Thus, a borrower who received a loan of $200 for two weeks would owe $230 when his or her paycheck arrived. On an annual percentage basis, that works out to 460%. Internet-based loan fees can be even higher. "These online payday loans can have annual percentage rates of 600% or more," said Ellen Harnick, senior policy counsel for the Center for Responsible Lending, an advocacy group. "This is a relatively new way for the industry to get out from under state laws."
Barry Brandon, executive director of the Native American Financial Services Assn., says the organization now counts 16 tribes as members and is adding one nearly every month. "Tribal lending is a financial lifeline for many tribes," Brandon said, noting that some tribes' reservations are too remote for casinos.
But there have been reports of some tribes extending their sovereign status to non-Indian payday lenders in what some have called "rent a tribe" deals.
The Federal Trade Commission filed a lawsuit last year against AMG Services, a Kansas payday loan company that allegedly tied up with Indian tribes to avoid state regulations. According to the FTC suit, AMG, founded by race car driver Scott Tucker, claimed that it was owned by the Miami and Modoc tribes of Oklahoma and the Santee Sioux of Nebraska. But Colorado officials, who also are trying to crack down on tribal lenders, have said in separate state court hearings that the tribes received only a small fraction of AMG's earnings.
A question now is how much authority the federal Consumer Financial Protection Bureau has over tribal lenders. The answer is unclear, and a legal battle is almost inevitable. Richard Cordray, the director of the bureau, served notice last year that he believes his agency has jurisdiction over tribal lenders. "If there is legitimately a tribal entity that can oust a state of effective jurisdiction to enforce laws against that entity, it does not oust the federal government," he said.
Brandon at the Native American Financial group said tribes may be willing to compromise by accepting the consumer bureau as a "co-regulator" of the industry, along with the tribes' own oversight of loan businesses.
Sen. Jeff Merkley (D-Ore.) has sponsored the Stopping Abuse and Fraud in Electronic Lending Act, which, among other things, would require online lenders to abide by the rules of the state where a borrower lives. This would theoretically require tribal lenders to follow state regulations or not do business in a particular state.