Legal/Regulatory September 11, 2013, Indian Tribes Press Their Online Loan Case Against New York By PETER LATTMAN Since becoming New York State’s top financial regulator in 2011, Benjamin M. Lawsky has aggressively pursued wrongdoing far beyond the state’s borders, investigating financial consultants in Washington, insurance industry practices nationwide and money laundering overseas. On Wednesday afternoon, two American Indian tribes, their businesses under attack by Mr. Lawsky, argued in Federal District Court in Manhattan that the regulator had overstepped his jurisdictional bounds. The tribes, each halfway across the country, are in Mr. Lawsky’s cross hairs over online lending operations run from their reservations. Last month, New York’s Department of Financial Services unveiled an aggressive campaign against the payday lending industry, seeking to stamp out Internet businesses that offer small, short-term loans at exorbitant interest rates. But the Indians fought back. They sued Mr. Lawsky, arguing that their sovereign status protects them from regulation by New York. The two plaintiffs in the case are the Otoe Missouria Tribe, in Red Rock, Okla., and the Lac Vieux Desert Band of Lake Superior Chippewa Indians, in Watersmeet, Mich. The Otoe Missouria tribe operates American Web Loan and Great Plains Lending, and the Lac Vieux Indians run CastlePayday. “New York alone is saying ‘We’re the ones who get to control everything,’ “ David Bernick, the lawyer representing the tribes, said before a courtroom packed with Indian leaders. “My clients’ businesses are being destroyed because New York has decided that tribal sovereignty doesn’t matter to them,” Mr. Bernick said. “This is an exercise in arrogance, and people are suffering as a result.” Mr. Lawsky did not attend Wednesday’s hearing before Judge Richard J. Sullivan. But in court papers, he has said that despite the tribes’ claims of sovereignty, he has the power to protect vulnerable New York consumers from Indian-run businesses that reach beyond reservation borders. He has argued that insulating tribal businesses from regulation would hamstring New York’s ability to enforce its laws against predatory lending. “State laws like New York’s usury statutes may validly be applied to economic transactions between Native Americans and New York consumers when those transactions have significant and injurious off-reservation effects — as is the case here, given the crippling debt that payday loans cause to New Yorkers,” lawyers for Mr. Lawsky wrote in a court filing. As part of an effort by regulators across the country to eradicate illegal payday loans, Mr. Lawsky sent letters last month to 35 online lenders — 11 of which asserted ties to Indian tribes — asking them to “cease and desist” from offering loans with interest rates that, in some cases, exceeds 500 percent annually. He also sent letters to more than 100 banks, notifying them of his investigation and asking for their cooperation. With the states cracking down on payday lenders, Indian tribes have sought to fill the void by entering the business over the last several years. They say these e-commerce ventures have become vital sources of revenue, especially for those tribes whose remote locations inhibit their ability to operate successful casinos. Revenue from lending accounts for roughly half of the Otoe-Missouria Tribe’s nonfederal budget, according to a court filing. “Every Indian tribe worth its salt has to provide health care, public safety, education and a panoply of essential services to its members,” said Matthew L. M. Fletcher, a law professor at Michigan State University and an authority on Indian law. “These tribes must reach off the reservation to conduct business because there is a desperate need for revenue.” But New York regulators say that business violates state law. After Mr. Lawsky sent his “cease and desist” letters, New York’s attorney general,Eric T. Schneiderman, filed a lawsuit against Western Sky Financial, an online lending business operated by the Cheyenne River Sioux Tribe. Last week, Western Sky, based in Timber Lake, S.D., suspended its operations and laid off nearly 100 employees. An affiliated business, Cash Call, remains in operation. Western Sky has also accused New York State of overreaching. A lawyer representing Western Sky, Katya Jestin of Jenner & Block, said that her client would move to dismiss the lawsuit next week on similar grounds as the tribes that had already brought action against Mr. Lawsky. “Consumers voluntarily entered into the loans and agreed when they signed the loan agreements to be bound by the laws and the courts of the Cheyenne River tribe,” Ms. Jestin said. “New York’s lawsuit is an attempt to sidestep 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 lack that power. Lawyers for the tribes argue that Congress, when it passed the Dodd-Frank Wall Street regulatory law in 2010, could have chosen to exercise authority over tribal nations’ lending businesses. Instead, Dodd-Frank placed states and tribes on equal footing under federal consumer-finance regulations. The law, said the tribes’ lawyers in a court filing, “explicitly refused to subjugate tribal lenders to the jurisdiction of the states.” The tribes liken online lending businesses to their gambling operations. They argue that New York State should not be able to stop its residents from voluntarily reaching out for high interest-rate loans, just as a state’s anti-gambling laws cannot forbid tribal casinos from serving New York residents who travel to them. And each tribe says that it has created its own regulatory authority. Loan industry specialists noted that if the tribes were barred from doing business in New York, they could still issue high interest-rate loans to consumers elsewhere. Payday loans — named because they are often secured by the borrower’s next paycheck — are illegal in just 15 states. The tribal businesses could also issue loans in New York State at no more than the state’s maximum interest rate of 16 percent. Regulators across the country are also concerned about the so-called rent-a-tribe issue. In those cases, rogue payday lenders have associated with American Indians, using tribal sovereignty as a shield to make predatory loans beyond the reach of state usury laws. Investigators are also examining the role of the banks in providing the capital for the tribes to conduct their lending businesses. Mr. Lawsky’s office appears interested in these issues. On Wednesday, Garrett Coyle, a lawyer in the New York attorney general’s office, told the judge that New York would like to further examine the sources of the tribes’ financing, and whether these lending businesses “are bona fide arms of their respective tribes.”
Posted on: Thu, 12 Sep 2013 04:40:54 +0000
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