Payday lenders have never enjoyed a favorable public opinion. These companies are generally seen as manipulative at best and predatory at worst by taking advantage of persons in need of quick and easy financial assistance. In a move that is certain not to win these companies any more fans, payday lenders in increasing numbers are reaching out to form partnerships with Native American tribes.
At first glance, it does seem to be an unusual paring. However a look at the facts behind this partnership quickly reveals the benefits for both parties—and the detriment to consumers.
Payday lenders must operate within the laws and regulations dictated by the state in which the company resides. However 38 states have enacted specific statutes that regulate payday lending, many of which cap the interest rates payday lenders can charge. Native American tribes, however, are not subject to state laws and operate with tribal sovereignty. As you may have guessed, tribes generally do not have rules capping the interest payday lenders can charge. So while a payday lender operating under New York state law is subject to New York’s 16 percent interest rate cap, a payday lender operating as a tribal entity within the same state can charge an interest rate more than 40 times that amount.
But the catch is these businesses generally operate on the Internet, not on tribal land. So even though Plain Green Loans, which is a “tribal entity wholly owned and operated by the Chippewa Cree Tribe of the Rocky Boy’s Indian Reservation,” is located in Montana, it can still offer its 378.95 percent rate to residents of New York via the Internet. So while tribal payday lenders do not operate in all 50 states, online payday lenders organized under tribes in Missouri, Oklahoma and Florida can look to residents from all 50 states as potential customers. And online loans are a growth area for these businesses. A report by JMP Securities found that 35 percent of all payday loans made in 2010 originated online. By 2016, that number is expected to increase to 62 percent.
A Google search for “Indian tribe payday loans” produces a bevy of options. Companies like Castle Payday, AmeriLoan, Clear Creek Lending, Northern Plains Funding, and Sierra Lending are just some of the many companies who claim to be tribal entities. So what do tribes like the Lac Vieux Desert Band of Lake Superior Chippewa Indians, Miami Tribe of Oklahoma and Otoe-Missouria Tribe of Indians have to gain from these partnerships? By affiliating themselves with companies in this multi-billion dollar business (payday lenders made $32 billion in 2012), a tribe can expect to see a small percentage of the affiliated company’s gross or net profit. Given that sometimes tribes do little more than lend their name and tribal status to these partnerships, it is an easy way for the tribes to bring in revenue.
But government entities are taking note. In June 2012, the Consumer Financial Protection Bureau (“CFPB”) began a formal investigation into tribal payday lending practices, issuing civil investigative demands to three tribe-affiliated payday lenders. They, of course, have fought the CFPB’s investigation, arguing in a recent opposition that the CFPB (like state regulators) does not have authority over these sovereign tribes, and therefore the CFPB’s demands cannot be enforced. Other government entities, like the Federal Trade Commission, Justice Department and several states’ attorneys general have pursued actions and filed investigations against tribal payday lenders.
Cases have made their way through court systems as well, unfortunately resulting in some unfavorable rulings in Colorado and California. In an opinion affirming the lower court’s decision in People v. Miami Nation Enterprises, Presiding Judge Dennis M. Perluss of the Court of Appeals of the State of California wrote:
“In the end, tribal immunity does not depend on our evaluation of the respectability or ethics of the business in which a tribe or tribal entity elects to engage… Neither third-party management of day-to-day operations nor retention of only a minimal percentage of the profits from the enterprise (however that may be defined) justifies judicial negation of that inherent element of tribal sovereignty.”
Sadly, a similar argument was made in the State of Colorado v. Cash Advance. After a 7 year court battle, the case was dismissed when the final ruling recognized that the payday lenders in question operated as an “arm” of the tribe and therefore, by extension, had sovereign immunity.
The Miami decision has been appealed to the California Supreme Court, and one can only hope the court will recognize this dubious partnership between payday lenders and tribal organizations does not merit the benefits of tribal sovereignty.
One thing this does merit: a place in Wexler Wallace’s Hall of Shame.
Photo Credit: Jason Comely