Tribal Payday Lending – A New Growth Industry

Tribal Payday Lending a New Growth Industry

Native American tribes across the U.S. are gaining financial footing in issuing online payday loans. While some tribal nations have the monetary resources to support their enterprising endeavors, many others are engaging in irresponsible lending practices that are illegal in most states. Protected by sovereign immunity, tribes are able to self-regulate their lending codes, leading to widespread controversy over fair practices and murky lines about enforcement.

The Proliferation of Native Lending Programs

Al Jazeera America reports that in 2014, nearly one-quarter of the multibillion-dollar profits amassed by the online payday loan industry was collected by tribal nations. Of the more than 560 tribes, roughly 30 reservations are involved in the payday lending industry.

The Native American Financial Services Association (NAFSA), the umbrella organization that advocates for responsible payday lending practices, notes that “tribal online lending provides a critical economic lifeline for sovereign tribes in remote areas.” Like casinos, the revenue generated from payday lending businesses is used to fund tribal infrastructure as well as cultural, youth, employment and health care programs.

An article on Indian Country Today notes that online tribal lending companies provide a critical service for Americans when they find their basic needs cannot be met after financial disaster strikes and traditional banks have turned them away.

Among the oldest and largest providers of payday loans is the Navajo Nation, which implemented capped annualized interest rates a decade ago. However, opponents claim that the majority of tribal lenders are online enterprises that are fronted by tribes but backed by non-native scheming financiers, who are trying to hide behind sovereign immunity.

Tribal Payday Lenders Skirt State Laws

State laws limiting the payday lending industry during the past two decades have made a tremendous difference in reining in the worst black hat practices, such as charging triple digit annual interest rates and loaning large sums of money that borrowers cannot afford to pay back. However, as sovereign nations, Native American tribes are able to set their own rules on short-term lending, according to a resolution passed by the National Congress of American Indians.

In a practice referred to as a “Rent-a-Tribe,” tribal nations that do not have the self-sufficient financial means to support their own lending programs have begun partnering with non-native lending companies that provide the monetary backing. Shielded by their sovereign immunity, the tribes operate as the official owners and operators of the payday lending service despite having little to do with servicing, distributing or collecting the loans. In return, the tribes collect a percentage of the gross revenue, which can total tens of thousands of dollars each month.

These tribal payday lending programs operate online, which allows them to skirt state caps on income and interest rate lending laws as well as violate state racketeering and consumer protection regulations. The interstate practice enables federal government agencies, including the Federal Bureau of Investigation (FBI), Internal Revenue Service Criminal Investigations and United States Postal Inspection Service, to step in to determine if there is a conspiracy taking place to evade state laws.

CFPB Advocates for Federal Legislation

Under the leadership of Director Richard Cordray, the Consumer Financial Protection Bureau (CFPB) is working with state and federal prosecutors to find ways to close the tribal payday lending loopholes. According to CFPB records obtained by Al Jazeera America, nearly 3,500 consumer complaints were lodged against 63 tribal payday lending businesses in 2012 for deceptive contracts and harassing debt collection strategies. Both New York and Connecticut have unsuccessfully tried taking on the Oklahoma-based Otoe-Missouria tribe and the Michigan-based Lac Vieux Desert Band of Lake Superior Chippewa Indians for issuing online loans with rates nearing 450 percent to its northern residents.

However, a Department of Justice case in the Eastern District of Pennsylvania achieved a victory in cracking down on the unregulated industry in April 2016. Rather than pursuing action against the untouchable tribe, prosecutors charged the non-native lending partners with violating the Racketeer Influenced and Corrupt Organizations Act (RICO). Two Americans and one Canadian were indicted for unlawfully generating more than $688 million in revenues from payday loans using practices that are illegal in Pennsylvania.

According to court documents, the racketeering conspiracy involved paying three tribes to pretend they were the actual lenders. While a conviction is still pending, the proposed 12 years in prison, fines and restitution could go a long way in dissuading predatory lenders from “renting tribes” to evade state lending regulations.

To learn more about avoiding trending predatory lending practices, visit the Moneyblog on PersonalMoneyStore.com.

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