How Online Payday Advance Lenders Bypass State Laws

Payday advance lenders face increased regulations and a challenging job in trying to reform the industry’s image under increased regulatory efforts at the state and federal levels. Many responsible lenders are working within trade associations and trying to comply with new regulations from the states and the CFPB, but maverick lenders paint all short-term lenders with the same stained brush. Many of these opportunistic lenders circumvent state laws in various ways, but none is more common than partnering with Native Americans who are immune from many state and federal laws when they operate on tribal reservations where they enjoy tribal sovereignty.

It’s not just casinos that can circumvent state laws on gambling. Tribal sovereignty extends to all areas governing the tribal reservation including the right to set each tribe’s own lending and commerce laws. For example, KFOR.com reports that American Web Loan, which is owned by the Otoe-Missouria Tribe of Oklahoma, operates its financial offices right behind the tribe’s casino and offers online payday loans at usurious rates while remaining free of state lending restrictions.

Usury has become common among tribal reservations, but the Native Americans aren’t necessarily the ones to blame as payday advance lenders charter companies that operate on tribal lands to bypass state and federal restrictions.

Payday Advance Lenders Skirt Both State Regulations and Federal Regulations

These tribes give payday advance lenders who are trying to comply with state and federal laws a bad reputation because some people consider them the same as predatory tribal lenders. The KFO report describes a situation where borrower Sonya Viers took out a loan for $800, made more than $2,000 in payments and still owed the full principal. The Otoe-Missouria Tribe refused to comment but issued a statement that its online payday advance loans were more affordable than most payday loans, overdraft fees and other costs involved when people are short of cash.

Native American tribes often partner with organized crime and unscrupulous lenders when structuring casinos and loan companies. The tribes might receive only about 1 percent of the proceeds while criminals reap the benefits of gambling and lending money without state or federal restrictions. The Otoe-Missouria Tribe commented, “Customers pay only for the credit they need for as long as they need it, and [we] always encourage and never penalize early repayment.” Low-income and undereducated people and those with bad credit are ready targets for both casino gambling and predatory online payday loans.

Critics Contend that Payday Advance Loans Often Originate from Lenders Impersonating or Deceiving Native American Tribes

Payday advance loans–when they come from online lenders–can be especially risky if you can’t identify where they originate. Online lenders often target unsophisticated borrowers with extraordinary interest rates, multiple rollovers and longer term payday loans online at short-term rates. The monthly installment payments might only cover the interest charges and never reduce the original balance. These are the kinds of payday advance loans that some high-profile online lenders offer.

According to a report posted at Huffingtonpost.com, online lending is one of the fastest growing financial segments, and the industry’s income has tripled in 10 tears. Unethical lenders will do anything to bypass state laws and don’t even care whether you repay the original loan. Jay Speer of the Virginia Poverty Law Center commented, “They just want a certain amount every couple weeks–as much as they can beat out of you until you default.”

Sovereign Immunity for Online Payday Loans Might Be Challenged

The states and the Consumer Financial Protection Bureau are looking at ways to close the loophole that allows tribes to charge rates higher than are permitted by law. However, this opens up potential challenges to tribal sovereignty that would almost certainly go to the Supreme Court for adjudication.

Hartfordbusiness.com reports that the state of Connecticut recently prosecuted the Otoe-Missouria tribe for offering payday loans under $15,000 at interest rates ranging from 200 percent and 450 percent. The tribe claimed that the prosecutions violated tribal sovereignty, but state banking commissioner Howard F. Pitkin rejected the claim.

The tribe, which is based in Oklahoma, offered these payday loans online to generate jobs and income for its members. The case has been appealed, and a Connecticut judge ruled that Native American lenders are immune from state usury laws according to Law360.com.

In other developments, some states are looking at ways to restrict online payday loans without challenging tribal sovereignty. According to Pymnts.com, one case in the Eastern District of Pennsylvania involved pursuing a tribe’s lending partners under RICO, or the Racketeer Influenced and Corrupt Organizations Act. This statute is often used to prosecute organized crime and gangs such as the Hell’s Angels.

Creative Lenders Find Ways to Offer Payday Loans Online While Circumventing the Law

Getting payday loans online can be a tremendous convenience for consumers, but there are always risks–especially when borrowing from unknown entities like Native American tribes. The Huffington Post report described a borrower who needed money for a down payment, so he borrowed $1,000 from Silver Cloud Financial, Inc. The borrower authorized automatic payment deductions from his bank account and found out that he would pay $4,150 to satisfy the loan over a 10-month period. Although the borrower earned $48,000 annually, he ended up borrowing from other lenders to pay normal living expenses.

Bad Credit Ratings Are a Recipe for Higher Costs

People who have bad credit are victimized by increased interest rates, late fees, penalties, reconnection charges and many other costs. Most payday lenders offer short-term help for those who need emergency cash, but there are lenders who abuse people with bad credit such as lenders who use tribal laws solely to circumvent state laws. Critics of the tribal lending model point out that most of these lenders maintain only the thinnest of relationships with the tribes. In some cases, it’s almost a case of “rent-a-tribe” to loan money without being subject to state usury laws.

Dodd-Frank Act Was Intended to Protect Native Americans

One of the most anticipated benefits of the Dodd-Frank Act, which created the CFPB, was the protection of Native Americans who were stripped of their lands. Given authority over their own reservations, tribe members have still been victimized with bad credit problems, upside-down mortgages, predatory tax refund-anticipation loans and high-cost credit card balances according to the Treasury.gov website. It’s highly ironic that the legislation meant to protect tribe members is being used to victimize them further through deceitful business relationships with unethical lenders.

The payday advance industry–like any bank or financial lender–has its share of reasonable and predatory operators. Wall Street excesses, banking indiscretions and artificial price manipulations are just a few of those unethical business practices that routinely dominate the news cycles. Find out more about how some unscrupulous payday lenders evade state laws by hiding under tribal protections at the Personal Money Store.

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