Stepping in where state regulators have failed, federal officials are investigating what they call predatory online payday loan operations that claim immunity from consumer protection laws because they are owned -- or appear to be owned -- by Native American tribes.
The Federal Trade Commission and U.S. Consumer Financial Protection Bureau believe that some of the burgeoning operations are owned or controlled by non-Native Americans, who are using the Native American tribes' rights of "sovereign immunity" to shield them from consumer protection laws.
The loans, some carrying the equivalent of annual interest rates higher than 750 percent, are widely available online -- to Native Americans living on reservations as well as anyone else living anywhere in the United States. State and federal investigators say that some of these operations deceive consumers (in many cases, people who already have maxed out their credit cards) about the costs of the loans, and also engage in abusive and unlawful collection practices. So far, they have remained largely out of reach.
"If, in fact, that entity is not truly a tribal entity, but it's just a sham arrangement, then the courts would have an opportunity to look through that and see it for what it is," CFPB Director Richard Cordray told a group of state attorneys general in March 2012.
FTC Commissioner Julie Brill said her agency and the CFPB are working together on the issue. "It's one of the working groups that we have going now -- payday lending," she told the group. "And, obviously, how the actors have moved online and into tribal relationships is going to be an important part of that discussion."
'A declaration of war'
Reflecting the tensions inherent in the issue and in all matters regarding relations between the federal government and Native American tribes, Charles Moncooyea, vice chairman of the Otoe-Missouria Tribe of Oklahoma, called Cordray's comments "a declaration of war against Native American tribal governments."
"The fact is our tribe, and tribes nationwide, benefit from the positive economic impact from these and other business activities, with revenues directed toward such critical needs as medical care, education and many other basic necessities," Moncooyea said. "We will not cower in the face of these malicious and dangerous attacks."
Payday loans tend to be short-term affairs that offer modest amounts -- typically, no more than $1,000 for an initial loan -- to high-risk customers at extremely lofty interest rates. Approval can come instantly or within 30 minutes. Online operations often deposit the loans in borrowers' checking accounts within 24 hours. The debts generally are backed by the borrower's future paychecks.
Customers tend to be those with little or no access to other credit. They also tend to be relatively unsophisticated about financial matters. Nevertheless, the field is growing. Cordray said Americans are borrowing billions of dollars every year through payday loans.
To some extent, the probe into payday loans and tribal relationships reflects a new phase of supervision of the entire field, both on and off tribal reservations. Prior to the CFPB's creation in 2010, only state officials maintained regulatory oversight of payday lenders, Cordray said.
"At the bureau, we now have the authority to examine nonbank payday lenders of all types and sizes ... ," he said during a Jan. 19 "field hearing" on the matter. "So, now, the bureau will be giving payday lenders much more attention. This is an important new area for us, as we see it."
Still, much of the current attention is focused on tribal payday lenders -- or firms that merely appear to be owned and operated by Native Americans living on tribal lands. In both cases, these firms are proliferating swiftly.
Loans 'easy as 1-2-3'
"Our cash loans are as easy as 1-2-3," a tribal online operation called Plain Green says on its website. In smaller print, it tells first-time customers that its loans tend to carry annual interest rates of 299.17 to 378.96 percent.
An online firm called Bear Paw promotes its "hassle-free" application process. Deeper in the website, it says that a customer taking out an ultra-short-term $450 loan (with repayment due on the borrower's next payday) could end up paying $607.50, a transaction that would generate an annual percentage rate of 751.47 percent.
Both operations say they are "wholly owned by the Chippewa Cree Tribe of the Rocky Boy's Indian Reservation, Mont., a sovereign nation located within the United States of America," and both say they are "operating within the tribe's reservation."
'Sovereign immunity' a key
These are crucial points for regulators trying to protect consumers, and for tribal leaders trying to defend their rights under sovereign immunity while also providing Native Americans with much-needed capital.
The legal concept of sovereign immunity is complex, but when it comes to commerce (including payday loans, casino gambling and cigarette sales), it sharply curtails the actions of state regulators. In fact, cases against apparent tribal payday loan operations are frequently tossed out of state court on such grounds.
Technically, the legal concept does not constrain federal officials from acting against payday lenders; but, given the tensions that have pervaded federal government/Native American relations for generations, the issue is highly sensitive.
"Whenever the feds get involved, it is almost always at the cost of some right of the tribe to govern itself," said Chuck Trimble, a member of the Oglala Lakota Nation in South Dakota and a former director of the National Congress of American Indians -- a Washington, D.C.-based group that works to preserve Native American rights.
Trimble opposes federal regulation of tribal-based payday loans, but he is also a sharp critic of tribal entities that run, or allow themselves to be co-opted by, the operations.
"Tribal leaders must think of the consequences of their actions," he said. "We can't be damning the ‘greedy white man' and still let greed endanger our rights as sovereign entities."
Neither Plain Green nor Bear Paw have come under regulatory attack, but the FTC filed a case in April against Scott Tucker (a semi-professional race car driver), his brother and other non-Native Americans. The suit claims that their payday loan operation piled inflated fees on customers, employed abusive collection tactics and aligned itself with tribal entities in an effort to seek immunity from regulation and possible prosecution.
The FTC also has filed a case against tribal payday lender Payday Financial LLC, charging that it unfairly compelled debt-burdened consumers throughout the country to travel to South Dakota and appear before a tribal court that did not have jurisdiction over their cases.
Those actions and the new round of statements by officials of the FTC and CFPB have alarmed many tribal leaders. They say that most payday lenders operating under the auspices of Native American tribes are truly owned and controlled by Native Americans, and that these loans provide a genuine service to Native Americans and other Americans with limited access to credit. They say that the tribes will fight any incursion of their rights.
"The lack of understanding about how Native American tribes can and do engage in commerce for their economic development creates confusion and additional bias," said Barry Brandon, executive director of the Native American Fair Commerce Coalition, a newly formed trade group that says it represents tribes across the country and more than 10,000 individuals.
"Understanding that Native American tribes are sovereign governments and have the authority to create and regulate businesses on their lands is the first step to understanding the unique place that Indian tribes occupy in our country," Brandon said.
All well and good, said Trimble, but much more is at stake here.
"I have no question about the tribes' sovereignty and the powers that derive from their sovereignty," he said. "But I decry even the appearance of abuse of those powers for financial gain.
"The tribal people have suffered long from federal policy, especially where such policy has stunted the tribes' potential for economic development, and I understand tribal leaders' desire and even desperation to attract capital to make up for the decades of frustration they've faced in trying to finally serve their people," Trimble said.
"But I feel that the dignity and decorum of sovereignty must be maintained."
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