Predatory Payday Lenders Try to Hide Behind Indian Tribal Immunity; Public Justice Urges High Court Review
By Leslie Bailey, Staff Attorney and Paul Bland, Senior Attorney
In their quest to prey on vulnerable low-income consumers, internet payday lenders are now trying to use Indian tribal immunity to avoid being held liable under California’s consumer protection laws. We are urging the California Supreme Court to grant review in People v. Miami Tribe Enterprises, a case that could determine whether these businesses—which make short-term loans over the Internet using trade names such as Ameriloan and US Fast Cash—will be able to evade California laws by setting up sham affiliations with Indian tribes.
Predatory lenders, and particularly payday lenders that charge exorbitant interest rates well over 300 percent, have a long history of using various subterfuges to try to evade state consumer protection laws. For years, for example, payday lenders claimed they weren’t making “loans” (and therefore could not be said to be charging interest), but were instead charging a “fee” for the service of not cashing a check for two weeks. Courts had no trouble seeing through that sham.
When that scam failed, the payday lenders turned to national banks, which are exempt from many state lending laws. For years, payday lenders would pay certain disreputable national banks a small percentage of their profits for the right to operate in the bank’s name. But courts caught on to the fact that the national banks were putting up none of the money and doing almost none of the work; these sham “rent-a-bank” arrangements failed; and the payday lenders again had to face state consumer protection laws.
Now, some payday lenders are trying a new tactic: claiming that they are owned by Indian tribes, which have immunity from many state laws. The problem is that most of these arrangements are a joke—the Indian tribe lends its name to a pre-existing lending enterprise, and corporate documents are drawn up to give the impression of a tribal business, but all the money is put up by a few non-Indians who are near billionaires, and nearly all the profits are funneled away from the tribes and into the pockets of the non-Indians who call the shots.
The online payday lending industry raked in over $10 billion in 2012, according to BusinessWeek. But an investigation by iWatch News revealed that Scott Tucker—the (non-Indian) Kansas millionaire whose companies are at the center of this case—has amassed a fortune from the payday loan business, using his money to purchase Lear jets and opulent properties and finance his private racecar company, while members of the Miami Tribe of Oklahoma (which on paper “owns” the lender) struggle with continued poverty.
In People v. Miami Tribe Enterprises, a California court of appeal looked at one of these sham arrangements and essentially said that so long as certain corporate formalities are followed, courts need not look at the economic realities such as whether the payday lender is truly an arm of the Indian tribe or whether the tribe is just getting paid a fee to rent its name and immunity to the lender.
If the opinion stands up, predatory lenders—in this case, businesses that have charged California consumers annual interest rates of over 1,000 percent for short-term loans—can bribe Indian tribes with relatively tiny sums of money in exchange for sharing in the tribes’ special legal status, creating a shield that lets the actual lenders flout consumer protection laws such as caps on usurious interest rates. This decision also threatens to throw California law into chaos, as lower courts face conflicting precedent in the courts of appeal as to the proper “arm-of-the-tribe” test.
Fortunately, California’s Attorney General, Kamala Harris, is not taking this bad decision sitting down. Her office has petitioned the California Supreme Court to review (and hopefully overturn) the Court of Appeal decision. The Attorney General rightly explained how this ruling conflicts with a better-reasoned decision by another court of appeal, which—instead of taking the lender’s word for it—holds that courts must look at the facts, such as whether an Indian tribe actually controls and oversees the business.
Public Justice has just filed an amicus brief that highlights how high the stakes are in this matter. First, we explain that if courts allow payday lenders to hide behind Indian tribes to shield their illegal acts, this runs a substantial risk of creating a backlash that could wipe away the entire doctrine of Indian tribal immunity and threaten tribal sovereignty. Our former colleague Amy Radon has written here about this risk.
Second, we urge the California Supreme Court to consider the recent rent-a-bank scam and follow the lead of the courts in those cases. Courts overwhelming saw through the sham arrangements between payday lenders and national banks and held that the lenders could not escape state laws. The reason the ploy almost never worked was that courts focused on what was really going on, rather than the labels that payday lenders put on the transactions. We think the California Supreme Court should take the same approach here.
If courts look behind the smoke screen of formalities at the actual activities of these lenders, it will be clear that these businesses are not being controlled or overseen by Indian tribes and are benefitting a handful of obscenely wealthy non-Indians, not promoting tribal autonomy. We hope the California Supreme Court will recognize the importance of this issue and do the right thing for both Indian tribes and California consumers.