The Legal Trick Payday Lenders Are Using To Skirt The Law

It's hard to believe a company can so blatantly thumb its nose at the rules, but they have a secret and some Biglaw bigshots on retainer to fight tooth-and-nail to protect their lending practices....

A 60-year-old Navy veteran needed money fast. So he did what far too many people do in that situation and applied for a short-term “payday-type” loan. When all was said and done, he was charged well over 100 percent interest. Seriously. One major player in the industry offered a $2,600, 47-month loan, and sought a total repayment of $20,280.03! That’s a 204.94 percent annual percentage rate!

Most of us realize that short-term lenders make their nut on exorbitantly high interest rates, but states have systematically cracked down on these companies and capped the interest they’re allowed to charge. State regulators have had a good deal of success in recent years securing hefty settlements for citizens victimized under state usury laws.

But our Navy veteran friend wasn’t so lucky. He got his loans from the wrong companies, and the state Department of Banking had to tell him that they were powerless to assist him.

It’s hard to believe a company can so blatantly thumb its nose at the rules, but they have a secret and some Biglaw bigshots on retainer to fight tooth-and-nail to protect their lending practices….

How do you avoid state laws? Headquarter in Indian Country, of course! Increasingly, the big players in short-term lending are managed by Native American tribes and headquartered on reservations, sheltered from those pesky state regulators.

But for all the companies the DOB could force to pay up, there are others that it can’t touch because they are owned by Native American tribes.

“They say you can’t touch us because we’re on an Indian reservation,” said [Connecticut Department of Banking Commissioner Howard] Pitkin. “Tribal sovereignty.”

It’s a lesson Dwight Graham learned the hard way after taking out three other loans from companies that the DOB can’t go after.

They include One Click Cash, which is owned by the Santee Sioux Nation of Nebraska; United Cash Loan, owned by the Miami Tribe of Oklahoma; and MobiLoans, which is owned by the Tunica-Biloxi Tribe of Louisiana.

All claim sovereign immunity, meaning Connecticut’s banking laws don’t apply.

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It’s more than just a handful of opportunistic tribal lenders:

“There are about 80 websites we know of offering unlicensed lending. Half of the business is done by five of the sites who claim tribal sovereign immunity from state banking laws,” [Consumer Federation of America’s Tom] Feltner said.

Half!

So Native Americans are ravaging the population through high-interest — one might say “predatory” — lending? What did America ever do to them? Oh, right. The systemic genocide and continuing humiliation. The “cycle of abuse” has been a hot topic this week and the relationship between America and the Indians is the cycle of abuse writ large. Land stolen, basic services underfunded, over-incarcerated — pretty much the only advantage they have left in its lop-sided relationship with the U.S. government is the exemption from state regulation. And, unsurprisingly, some Native tribes have capitalized on that advantage with industries designed to prey upon people facing hard times. Gambling and payday lending.

At least those industries make big money. Enough money to hire some high-powered lawyers.

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After several calls to these loan companies, the Troubleshooters discovered many are represented by teams of lawyers and public relations firms.

“We have one letter from a pretty high classed law firm which goes through two pages of ‘you can’t touch us’,” said Pitkin, “and in the last paragraph it says, ‘But, you know, customer service is really important to us.’”

The DOB wants consumers to know that if they get a loan from a company owned by a Native American tribe, the state can’t help.

So states are powerless. But where’s the federal government? The vagaries of the Trust Doctrine plenary power doctrine (UPDATE: don’t know why I blanked on that one — thanks to our tipster for pointing out that I cited the wrong one) grant the federal government sweeping powers over Native American lands. Well, it turns out the federal government is trying to fight back against these companies and running into a Biglaw brick wall.

A couple of Biglaw firms have represented one lender in an ongoing battle with the FTC. The FTC brought suit against AMG Services, Inc. alleging violations of the FTC Act, the Truth in Lending Act, and the Electronic Funds Transfer Act. The defendants originally retained Morrison & Foerster and are now represented by Kirkland & Ellis. They recently prevailed on a summary judgment motion brought by the FTC on a jurisdictional question:

However, the Report denied the FTC’s motion for summary judgment in response to the tribe’s second claim, and ruled that a genuine issue of material fact existed as to whether the tribal defendants are “corporations” as defined in the FTC Act. “Corporation” is defined in the FTC Act to include certain “entities organized to carry on business for their own profit or that of their members” [emphasis added]. As evidence that the tribal defendants are for-profit corporations covered by the FTC Act, the FTC presented the tribal defendants’ articles of incorporation and bank account opening form stating that the purpose of the entities is to generate profits. The tribal defendants countered that their entities are governmental instrumentalities or economic and political subdivisions of a sovereign nation, wholly unlike private corporations covered by the FTC Act.

If Native American “corporations” aren’t “corporations” within the meaning of the FTC, maybe the CFPB could help. This seems like their bailiwick. They’ve filed suit against some of the big players. But a quick look at PACER shows they are mired in motion practice over moving the case to California. Neil M. Barofsky of Jenner & Block is spearheading that defense/stalling tactic.

Beyond that case, the CFPB did rule against the payday lenders in a motion to quash Civil Investigative Demands, but the young agency hasn’t pressed the issue in court. Could they be afraid of losing?

Seriously, is anyone going to help out folks like our old Navy vet? The fact of the matter is that the lawyers for the tribes are probably right: Congress likely failed to consider the unique issues surrounding tribal sovereignty when it drafted these laws. That doesn’t mean Congress lacks the power to act though. If the FTC or CFPB ultimately fail with the judiciary, the ball is squarely in Congress’s court. But it’s unclear whether or not they’ll gather the political will to close this regulatory loophole.

Here I’ll help: let’s just say payday lending is all Obama’s fault. That should get them working.

Online Payday Loan Borrowers Charge Sky-High Rates [NBC Connecticut]
Feds eye online lending practices [TribLive]
Federal Court Agrees With Magistrate That Whether A Tribal Lender Is A For-Profit Corporation Is A Triable Issue Of Fact [JD Supra]
CFPB Tests the Limits of Tribal Lending Immunity With Cash Call Case [JD Supra]