Payday lenders have found a new way to circumvent state usury laws. By partnering with Native American tribes and operating under their sovereign status, payday lenders are able to lend to anyone in any state at whatever interest rate they choose.
The origins of tribal immunity date back to before the United States was founded. Tribes were sovereign nations at the time and subsequent legal acts between the settlers and the tribes continued to recognize that sovereignty. For this reason tribes cannot be sued unless Congress allows it or the tribe waives its immunity.
Though these lenders claim tribal sovereign immunity, many times they aren’t actually associated with the tribe. Tom Feltner, director of financial services at the Consumer Federation of America, told Marketplace that tribal payday loans often are not offered by the tribes, but by members of the tribe associated with an outside lender.
For tribes living in rural areas, away from large, well populated areas that would make casinos profitable, these payday lending partnerships provide a valuable source of income.
The benefit to lenders is that tribal sovereign immunity allows them to operate outside of state lending laws, including caps on interest rates and transparency requirements. This allows the lender to unify its pricing structure (i.e. keep interest rates the same in every state) and operate in states that have banned payday loans.
For example, in California, payday lending laws limit the amount of all short-term loans to $300 or less and cap interest rates at 15 percent. A report by CNBC found that the annual percentage rate on some tribal loans exceeds 700 percent.
Consumer advocates have also expressed concern about these lenders’ ability to directly access the bank accounts of their clients. Payday lenders and banks have come under scrutiny in recent months for allowing payday lenders to withdraw funds from borrowers’ accounts. When these accounts are overdrawn, borrowers are subject to steep overdraft fees.
Tribal payday lenders may face future regulation from Congress and the Consumer Financial Protection Bureau.
Last July Sen. Jeff Merkley sponsored the SAFE Lending Act , which would require all online payday loan lenders to cap their interest rates at the limit set by the borrower’s state of residence. CFPB director Richard Cordray was quoted saying that tribal sovereignty does not supersede federal law.
"If there is legitimately a tribal entity that can oust a state of effective jurisdiction to enforce laws against that entity, it does not oust the federal government," he said.