There are a variety of state laws that apply to licensed payday lenders. When a legitimate company operates outside the bounds of state law – such as with Native American tribal lending – state laws traditionally have not applied. According to the Center for Public Integrity, such a legal divide has resulted in a legal clash between Maryland regulators and Western Sky Financial, a personal loans provider that claims affiliation with the Cheyenne River Sioux Tribe.
Western Sky claims sovereign immunity
Western Sky Financial owner, Martin Webb maintains that his company’s short term loans activity amongst Native American tribes protects it from state laws. This is an argument that Maryland is challenging in court as it attempts to tighten the reins on personal loans legislation in the state. Maryland claims Native American lenders use tribal immunity to skirt existing laws and offer short term loans to customers nationwide. Critics of the industry await a Consumer Financial Protection Bureau ruling on whether industry-wide reforms will also impact native payday lenders.
Western Sky violates Maryland law, claims commissioner
Maryland deputy commissioner for financial regulation Anne Norton sees the Western Sky Financial personal loans issue in black-and-white terms:
“I don’t think there’s a lot of gray area in terms of what is or is not permitted,” Norton said. “Under our reading of both how tribal immunity is interpreted and how it’s been applied by the Supreme Court, we feel that these are loans that violate Maryland law.”
Maryland law caps payday lending APRs at 33 percent on the unpaid balance. As Western Sky Financial does not hold a Maryland license – the company operates online out of South Dakota and claims sovereign immunity as a member of the Cheyenne River Sioux Tribe – it currently operates outside the bounds of Maryland short term loans regulation. APRs charged for short term personal loans vary by state, but are generally at least three times higher than the Maryland cap.
Indian Commerce Clause and legal precedence
Webb’s attorney argues that under the Indian Commerce Clause of the U.S. Constitution, tribes are the ones responsible for regulating consensual relationships undertaken between non-members and members of a tribe. As Webb claims membership in the Cheyenne River Sioux Tribe, he believes his business should not have to recognize non-tribal payday lending laws.
While Maryland does recognize the sovereign immunity of the Cheyenne River Sioux Tribe, Norton argues that Western Sky Financial is not an arm of the tribe, and hence should not be protected.
It remains to be seen on which side of the argument a court will rule. However, as numerous instances of legal precedence in which federal courts have ruled in favor of native tribes exist – such as in the case of casino lending with the Lac du Flambeau Band of Lake Superior Chippewa reported by the Wall Street Journal – legal experts would not be surprised if Western Sky Financial’s protection continues, inseparable from Webb’s personal status.