Payday lenders turn to Indian tribes for business partnerships

Payday loan store

Payday lenders are having to turn to Indian tribes to form partnerships that can keep their businesses open. Photo: Chika/

In order to circumvent state regulations, payday lenders are turning to Indian tribes to stay in business. Indian tribes are protected legally by a doctrine known as sovereign immunity, which exempts them from some state and federal laws. Demand is well established for payday loans, but states are starting to regulate them out of business.

Stifling regulation sends payday lenders to tribes for legal shelter

Payday lenders have been subject to an increasing amount of regulation, to the point it is difficult for operators to keep their doors open. Some lenders are beginning to form business partnerships with Indian tribes in order to circumvent strict regulation that prevent lenders from being able to make a living in the payday loans industry, according to the Wall Street Journal. Indian tribes are protected by a legal doctrine called sovereign immunity, which grants certain exemptions from regulation and lawsuits. Payday loan lenders need only incorporate their business on tribal lands and form an agreement with the tribe in order to offer a cash advance in whatever manner the firm sees fit.

Sovereign immunity

Essentially,  an entity with the protection of sovereign immunity is protected from prosecution or lawsuit, but the extent of immunity varies. Native American tribes and reservations are considered nations unto themselves, and businesses incorporated on tribal lands are not subjected to the laws of the state or states the reservation is located in. For instance, say a short term loan lender incorporates on a reservation located in Arizona but doesn’t have offices on the reservation. Even though the loan company is not located on a reservation, it is incorporated on tribal land. Sovereign immunity exempts the company from having to comply with Arizona law regarding small loans.

The scourge of payday loans

Payday loans are treated like a leper by some within the financial services industry. Even though the demand for the services is well established and similar businesses existed before the Statue of Liberty was built, many have called for the industry to be legislated out of existence. Payday lending as an industry represents more than $10 billion in the U.S. economy as a whole.


Wall Street Journal

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