Payday Lending: Boon or Boondoggle for Tribes?
By Leslie Bailey
Staff Attorney
Earlier this week, the Washington Post published a fascinating piece profiling the Lac Vieux Desert Band of Lake Superior Chippewa Indians, a small Native American tribe that ostensibly went into the payday loan business in a quest for much-needed funding for tribal government. But what the article fails to mention is that some supposedly “tribal” payday lenders are not truly run by—or for the benefit of—an actual tribe.
Native American tribes are sovereign nations and in some circumstances are immune from liability under state law. It’s the promise of a Wild West free of government regulation and outside the reach of the civil justice system that has attracted lenders to the “tribal sovereign” model.
An increasing number of privately-controlled companies are affiliating themselves with tribes in an effort to take advantage of the tribes’ sovereign immunity from state law—a trend that threatens the rights of both tribes and consumers. Public Justice is representing borrowers victimized by unlawful payday loans and working to expose these “rent-a-tribe” arrangements and ensure that lenders can be held accountable when they break the law.
How do you tell the difference between a legitimate tribal business and a private lender pretending to be tribal? If you’re a court, you use what’s called the “arm-of-the-tribe” test. This test requires a court to look at (among other things) whether the tribe is truly the primary financial beneficiary of the lending enterprise and whether the tribe controls the business, and weigh whether extending the tribe’s immunity to the business would further the policy goals of tribal sovereignty. If a business is truly an arm of the tribe, then, as the article says, “state laws don’t apply.” To make this determination, we believe a court must look behind the corporate paperwork the lender (and its lawyers) drew up, and focus on the facts on the ground. The court in Felts v. Paycheck Today et al., a class action pending in New Mexico, agreed, and we are now gathering evidence in that case.
One of the most important factors courts look at is the financial relationship between the tribe and the business. According to the article, profits from the Castle Payday lending enterprise account for “42 percent” of the Chippewa band’s annual budget and fund health care and education services.
But in the rent-a-tribe model, the tribe may receive no more than a token percentage of the lending revenues—even as little as one percent—while the bulk of the lending profits are funneled off to wealthy non-Indians who use the money to fund their personal hobbies.
An investigation by iWatch News revealed that Scott Tucker—the non-Indian Kansas businessman at the center of two of our cases—has amassed a fortune from the payday loan business, using his money to purchase Learjets and opulent properties and finance his private race car company. Meanwhile, members of the Miami Tribe of Oklahoma—which on paper appears to “own” the lending companies—struggle with continued poverty. Given these facts, it’s hard to imagine how a court ruling extending the tribe’s immunity to the payday lending business would benefit the tribe.
Harlan’s article also indicates that Castle Payday created job opportunities for some tribal members. But in the rent-a-tribe schemes, it’s not clear that any tribal members are employed—most or all of the work is believed to take place well outside the reservations’ borders, on property owned by (you guessed it) non-Indian businessmen. We believe that this and other evidence will show that the defendant in Felts is not truly an arm of the tribe and thus must abide by state law. And the California Supreme Court is poised to decide a payday tribal immunity case, possibly later this year.
Meanwhile, as these courts are about to decide whether payday lenders can use the tribal lending model to avoid state laws, other courts are weighing payday lenders’ efforts to use tribal arbitration to insulate themselves from the court system entirely. Many payday lenders have hit on so-called “tribal arbitration” as a way to avoid having judges review their business model or the outrageously high fees they charge the most vulnerable consumers. Recently, one federal appeals court called the system “a sham from stem to stern,” yet other courts have allowed the lenders to force cases challenging their practices into this system.
Separate from the tribal immunity and tribal arbitration issues raised in these lawsuits, there are ethical and policy reasons to question the virtue of even an authentic tribal payday lending business. As Harlan’s article points out, “Native Americans have been among the groups most targeted by usurious loans.” True, if a tribe goes into lending itself (rather than serving as a front for someone else’s business), at least some of the profits will flow to individuals who are economically disadvantaged rather than to benefit the One Percent. But we should be skeptical of exalting predatory lending as the savior of the disadvantaged poor. Payday lending doesn’t become less harmful just because it’s done by a tribe. And the effects of these short-term loans on low-income populations—particularly communities of color—aren’t any less devastating.
