How Tribal Payday Loan Companies Skirt State Regulations

Payday loan lenders are a wily lot. In the past, when states enacted laws in an attempt to curtail the industry, many lenders found workarounds. For instance, some cloaked themselves as different types of lenders while others modified the kind of loans that they offer. Lenders are also bringing Indian tribes into their companies. This step opened up new windows for lenders. Currently, tribal payday loan companies skirt state regulations because they’re exempt from local and state payday loan laws.

How Are Tribal Payday Loan Companies Exempt from State Regulations?

The U.S. Department of the Interior confirms that since the country’s constitution bestowed the Legislative Branch with complete power over Indian affairs, individual states are not permitted to enact rules over tribal governments unless Congress authorizes it specifically. Along with this mandate, tribes that the federal government recognizes have the power and authority to oversee what happens on their lands independent of state government control.

Tribes have the legal right to establish laws that are stricter or more lenient than states. Even though tribes have this power, they often cooperate and collaborate with neighboring states through contracts or other arrangements on matters that are communally concerning such as law enforcement and environmental protections.

Since states have no jurisdiction over tribal lending, tribes can charge borrowers excessively high interest rates without fear of repercussion.

Cracking Down on the Payday Lending Industry

More than a half-dozen states have enacted laws to crack down on the payday lending industry. By moving their operations to Indian country, payday lenders have been successful at skirting regulatory action. Statistics show that the short-term lending industry has increased by around 20 percent from 2009. A good deal of this growth is from online loans. In 2013, about 4.2 percent of Americans sought and acquired a payday loan compared to 2.4 percent who took one out in 2007.

During these same years, traditional lenders have toughened up their loan approval standards. Traditional lenders needed to take this step after the subprime years when loans were easy to get.

John Hecht, a top analyst for the New York investment banking firm Jefferies LLC, said, “All of the market flow has been going to the tribes. It’s almost like an unintended consequence of tightening regulation at a time when consumers have less access to credit.”

Tribal Payday Loan Outfits are Helpful and Controversial

Tribal payday loan lenders help those who are in a tight spot financially, but the loans often leave borrowers with out of control fees and debt. Even before Native American tribes joined the industry, payday loans were controversial.

The Washington Post reports that Native American tribes have entered the industry in a desperate attempt to earn money and provide a decent standard of living for their people. According to estimates, approximately two-dozen tribes are offering short-term loans.

Tribes are using the same rules that let them operate in the casino business, but in the case of short-term loans, some borrowers are racking up debt with interest rates that are double what brick-and-mortar payday lending stores are charging.

When People with Bad Credit Request Online Loans

While the request procedure is a breeze and the approvals speedy, high interest tribal loans are putting borrowers in dire financial situations. KFOR published a human-interest story highlighting this problem. According to the news source, Sonya Viers, a payday loan borrower and a widow with three kids, took out an $800 loan and struggled mightily to repay it. She said, “It has taken a big toll on my life.” Viers confirmed that she paid the lender around $2,000 without a dime of it decreasing her $800 principal amount.

The lender informed her that she needed to pay more than the $240 minimum payment to decrease the principal amount. The Oklahoma Department of Consumer Credit’s deputy administrator, Ruben Tornini, said, “They hide behind this sovereignty that is given to them by the federal government. Whenever we inquire about a consumer issue, their first response is that the state has no jurisdiction, which technically is correct.”

Looking at Payday Loans from Both Sides Now

The changes in the lending market have sent an influx of borrowers to tribal payday lending companies, and it’s up to the agents of these companies to wade through the requests to determine approvals. When it comes to tribal loans, both sides are desperate for funds. Borrowers are usually staring down the barrel of a financial emergency that is threatening to turn their lives upside down. This may include an unexpected medical expense or a car repair.

On the flip side, the Indian tribes are now dependent on the revenue. According to reports, lending revenue accounts for about 40 percent of a tribe’s annual budget. With this money, tribes have been able to keep healthcare and education services in place for their members. The payday loan industry has also brought decent jobs to some of the country’s most remote areas. Despite these benefits, a number of tribal leaders have come out against their people participating in the payday lending industry.

Connecticut Fines the Otoe Missouria Tribe

The state of Connecticut recently fined the Otoe Missouria Tribe $1.5 million. Connecticut claims that the tribe has charged payday loan borrowers excessive interest rates, which it argues is an abuse of the interest rate cap that the state has in place. Connecticut limits the interest rates for these loans to 12 percent.

The tribe struck a deal with an online lending company in 2010. Reports show that the payday loan company is earning about $100 million annually due to the arrangement. The tribe’s vice chairman, Charles Moncooyea, confirmed that they are receiving 1 percent of the company’s profits. He said, “All we wanted was money coming into the tribe.”

In 2013, three Connecticut residents complained to state officials about tribal loans. This caused the state’s Department of Banking to research the issue. It found that the company was unlicensed and that it was charging interest rates that were far more than state laws allow. The banking commissioner even issued a cease-and-desist order against the tribal lending company, which the tribe appealed.

After the case went to court, a Connecticut judge found in favor of the tribe, reaffirming its sovereign status. According to the judge, the tribe is immune from the Banking Department’s enforcement action. However, the case isn’t quite settled. The court referred it back to the Banking Department to decide whether a payday company is an arm of the tribe.

Tribes are Capitalizing on Their Right to Govern Themselves

There are those in the field who would argue that tribal payday lenders aren’t really skirting state regulations. Instead, they are capitalizing on the right to govern themselves. Along with managing their own interests, many tribes are in need of a revenue source. Payday lenders give them one. To read more about how Native American tribes are involved in payday loans, visit the Personal Money Store.

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