Indian tribes are refusing to comply with a New York financial regulator’s attempt to shut down their online-lending operations, arguing the state has no authority and is trying to block legal businesses.
Tribes that make loans over the Internet are planning to challenge Benjamin M. Lawsky, superintendent of New York’s Department of Financial Services, in tribal or federal court later this month.
“We are considering every legal avenue that we could possibly take,” said Robert Rosette, an Arizona lawyer who represents them.
Last week, Mr. Lawsky ordered 35 online and tribal lenders to stop offering “illegal payday loans” in New York.
He urged more than 100 banks and an industry-run group overseeing an electronic payments network to cut off access to those lenders, accusing them of violating a state law capping interest rates charged to consumers.
Online lenders say their operations are legitimate and those run by tribal governments say they don’t need to comply with laws of other states because they enjoy sovereign status under federal law.
“The targeting of tribally owned and operated businesses without any discussion or consultation is an insult to tribal nations and ignores over two centuries of federal Indian law,” Barry Brandon, executive director of Native American Financial Services Association, a group of 16 tribes that offer short-term loans over the Internet, wrote in a letter being sent to Mr. Lawsky.
The dispute is the latest example of tension between government officials and operators of online lending operations, which have surged in recent years despite protests from state officials who argue they are predatory. Several states have tried to shut off such lending through caps on interest rates that are generally far below what online lenders charge.
Online lenders not affiliated with tribes have set up shop in states with friendly regulations such as Delaware and Utah. They say they don’t need to follow laws in 15 states where such loans are effectively banned under interest rate caps.
When taking out loans from those lenders, consumers agree that the loan is being made under the law of the lender’s more favorable home state.
But New York officials argue they have the right to shut down lenders that are making loans to residents but not complying with their state law.
“The steps we are taking are legal and necessary to protect New York consumers from these illegal, harmful payday loans,” a spokesman for Mr. Lawsky said.
Short-term loans to cash-strapped consumers, known as payday loans, used to be made primarily from storefront locations. But that business has been on the decline in favor of online loans. Internet loans have nearly tripled since 2007 to $18.6 billion last year about 40% of all payday lending according to investment bank Stephens Inc.
State and federal officials have grown increasingly concerned about such loans, and the Department of Justice and bank regulators are moving to block online lenders’ access to an electronic payments system.
Indian tribes say lending operations have been a economic boon, paying for health care, college scholarships, education and housing in far-flung, impoverished areas where casinos don’t bring in much money.
“This has been a tremendous opportunity for my tribe,” said John Shotton, chairman of the Otoe-Missouria Tribe of Indians in Red Rock, Okla. Mr. Shotton’s tribe operates two lending operations that have been targeted by Mr. Lawsky: American Web Loan and Great Plains Lending.
–By Alan Zibel and Andrew R. Johnson
Read more at Wall Street Journal.
