Tribes challenge New York’s authority over loans

Chester Higgins Jr./The New York TimesKatya Jestin, a lawyer for Western Sky Financial, an online lender sued by the New York attorney general, said the lawsuit was trying to circumvent loan agreements.

Updated, 20:46 | Since becoming New York State’s chief financial regulator in 2011, Benjamin M. Lawsky has aggressively pursued wrongdoing well beyond state borders, investigating financial consultants in Washington, D.C., on domestic insurance industry practices and foreign money laundering practices.

On Wednesday afternoon, two Native American tribes, their companies attacked by Mr. Lawsky, argued in Federal District Court in Manhattan that the regulator had exceeded its jurisdictional limits.

Tribes, each across the country, are in Mr. Lawsky’s sights for online lending transactions executed from their reservations. Last month, the New York City Department of Financial Services unveiled an aggressive campaign against the payday lending industry, seeking to root out internet businesses that offer small, short-term loans at exorbitant interest rates.

But the Indians retaliated. They sued Mr. Lawsky, arguing that their sovereign status protects them from New York regulation. The two plaintiffs in this case are the Otoe Missouria Tribe, in Red Rock, Okla., And the Lac Vieux Desert Band of the Chippewa Indians of Lake Superior, in Watersmeet, Michigan. The Otoe Missouria Tribe operates American Web Loan and Great Plains Lending, and the Old Lake Indian Race CastlePayday.com.

“On its own, New York is saying ‘We are in control,’” David Bernick, the tribal lawyer, said in front of a courtroom filled with Indian leaders.

“My clients’ businesses are destroyed because New York City decided that tribal sovereignty didn’t matter to them,” Bernick said. “It is an exercise in arrogance, and people suffer for it.”

Mr. Lawsky did not attend Wednesday’s hearing before Judge Richard J. Sullivan. But in court documents, he said despite tribal claims of sovereignty, he had the power to protect vulnerable New York consumers from Indian-run businesses that cross reserve borders. He argued that isolating tribal businesses from regulation would hamper New York’s ability to enforce its laws against predatory lending.

“State laws like the New York Usury Laws can validly be applied to economic transactions between Native Americans and New York consumers when those transactions have significant and damaging off-reserve effects – as is the case here. , given the crippling debt that payday loans cause in New York. Yorkers, ”Lawsky’s attorneys wrote in a court file.

As part of an effort by regulators across the country to root out illegal payday lending, Mr Lawsky last month sent letters to 35 online lenders – 11 of whom claimed ties to Indian tribes – asking them to “cease and desist” from offering loans with interest. rates which in some cases exceed 500 percent per annum. He also sent letters to more than 100 banks, informing them of his investigation and asking for their cooperation.

As states crack down on payday lenders, Indian tribes have sought to fill the void by entering the industry in recent years. They say these e-commerce businesses have become vital sources of income, especially for tribes whose remote locations hamper their ability to operate successful casinos. Loan income represents about half of the Otoe-Missouria tribe’s non-federal budget, according to a court record.

“Every Indian tribe worth its salt must provide health care, public safety, education and a host of essential services to its members,” said Matthew LM Fletcher, law professor at University of Michigan and an authority on Indian law. “These tribes have to move out of the reserve to do business because there is a desperate need for income.”

But New York regulators say the cases violate state law. After Mr. Lawsky sent his “cease and desist” letters, the New York Attorney General,Eric T. Schneiderman, filed a lawsuit against Western Sky Financial, an online lending business operating on the Cheyenne River Sioux reserve in Eagle Butte, SD Last week, Western Sky, based in Timber Lake, SD, suspended operations and laid off nearly 100 employees. An affiliate company, Cash Call, remains in operation. Western Sky has also accused New York State of going too far.

A lawyer representing Western Sky, Katya Jestin of Jenner & Block, said her client would decide to dismiss the lawsuit next week on grounds similar to those of the tribes who had already filed a lawsuit against Mr Lawsky.

“The consumers voluntarily took out the loans and agreed, when they signed the loan agreements, to be bound by the laws and courts of the Cheyenne River Tribe,” Ms. Jestin said. “The New York trial is an attempt to circumvent these agreements.”

The concept of tribal sovereignty predates the formation of the United States and is preserved in treaties between the federal government and Indian tribes. While Congress can regulate the affairs of tribes and limit their sovereignty, states do not have this power.

Tribal lawyers argue that Congress, when it passed the Dodd-Frank Wall Street regulatory law in 2010, could have chosen to exercise its authority over the lending activities of tribal nations. Instead, Dodd-Frank put states and tribes on an equal footing under federal consumer finance regulations. The law, tribal lawyers said in a court filing, “explicitly refused to subject tribal lenders to state jurisdiction.”

The tribes compare online lending companies to their gambling operations. They argue that New York State should not be able to prevent its residents from voluntarily taking out high-interest loans, just like State anti-gambling laws cannot prohibit tribal casinos from serving New York residents who visit their homes. And each tribe says it has created its own regulatory authority.

Credit industry experts noted that if the tribes were not allowed to do business in New York City, they could still provide high-interest loans to consumers elsewhere. Payday loans – named because they’re often secured by the borrower’s next paycheck – are illegal in just 15 states. Tribal businesses could also issue loans in New York State at a maximum interest rate of 16%.

Regulators across the country are also concerned about the issue of a tribe’s rent. In these cases, rogue payday lenders have teamed up with Native Americans, using tribal sovereignty as a shield to make predatory loans beyond the reach of state usury laws.

Investigators are also examining the role of banks in providing capital to tribes to carry out their lending activities.

Mr. Lawsky’s office appears to be interested in these matters. Garrett Coyle, an attorney with the New York attorney general’s office, told the judge on Wednesday that New York would like to further examine the sources of tribal funding and whether these loan companies “are bona fide weapons of their respective tribes. . “

Correction: September 13, 2013
An article published Thursday on a lawsuit by two Native American tribes challenging the authority of New York’s main financial regulator to oversee lending transactions executed from their reserves misidentified the operator of one such lender, Western Sky. Financial on the Cheyenne River Sioux reservation in South Dakota. It is owned and operated by an individual resident of the reserve, not by the tribe itself.

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