By Karen Freifeld
NEW YORK (Reuters) - U.S. online lender Western Sky Financial LLC has agreed to pay a $1.5 million penalty and provide refunds to New York borrowers on loans for which it charged interest rates as high as 355 percent, the New York attorney general said on Thursday.
The lender had claimed ties to the Cheyenne River Sioux Tribe in South Dakota and immunity from state and federal law.
New York law prohibits most non-bank lenders not licensed by the state from charging more than 16 percent interest on small, unsecured loans.
The agreement, which settles a New York lawsuit, comes as states across the country have cracked down on Internet lenders offering so-called "payday" loans with exorbitant interest rates.
Western Sky suspended operations in September as a result of what it called "overreach by state regulators."
A lawyer for the company did not respond to a request for comment on Thursday.
New York Attorney General Eric Schneiderman, who sued Western Sky, its owner and affiliated companies in August, said the companies made 18,000 high-interest loans to New Yorkers since 2010, lending nearly $40 million in principal.
A $1,000 loan could cost as much as $4,942 in finance charges, fees and principal over two years, Schneiderman said.
Under the terms of the settlement, Western Sky and affiliated companies, which offered and arranged for the loans, agreed to stop collections from New York consumers who've paid more than their principal, and to cease collecting interest from all other New Yorkers, Schneiderman said.
A proposed order and judgment reflecting the settlement's terms has been submitted to New York state court, where the lawsuit was filed, Schneiderman said. He is expected to formally announce the deal on Friday.
Colorado settled a similar case against Western Sky and affiliated companies on Wednesday, agreeing to pay that state $565,000, Colorado Attorney General John Suthers said.
(Editing by Jeremy Laurence)