State and federal regulators are turning up the heat on companies making payday loans online and claiming they are immune from laws against such loans because they are operated by Native American tribes.
Last week, Arkansas Attorney General Dustin McDaniel announced a "consumer protection lawsuit" against three companies and two individuals accused of colluding to offer payday loans online at usurious rates to Arkansans and falsely claiming tribal affiliation.
Western Sky Financial, CashCall Inc., WS Funding, Martin A. Webb and J. Paul Reddam are alleged to have made payday loans at rates as high as 342%, on an annualized basis. Western Sky, based in South Dakota identifies itself as a tribal entity protected by tribal sovereign immunity. But McDaniel's office rejected that claim, arguing that Western Sky is not owned or operated by a tribe, and that in fact CashCall and its subsidiaries run virtually all of Western Sky's payday lending operations.
McDaniel has asked a state court to prohibit the three companies and two individuals from offering illegal loans in Arkansas, and that they be ordered to pay restitution, civil penalties, attorneys' fees and court costs.
Meanwhile, a federal judge has denied a request from two Native American tribes that New York's top financial regulator end a crackdown it's launched against the tribe's online lending businesses. Benjamin Lawsky, Superintendent of Financial Services in New York, has an investigation underway into online payday lenders, including several that are run by, or are connected to, Native American tribes. The two tribes - one located in Oklahoma and the other in Michigan - argued their sovereign status let them off the hook when it comes to state usury laws. But Judge Richard Sullivan in Federal District Court in Manhattan balked, insisting the plaintiff's justification was "wobbly," adding that the loans are being made far beyond the borders of tribal lands and the reach of sovereign immunity.
The New York ruling came on the heels of news that the federal Consumer Financial Protection Bureau (CFPB) had rejected a request from three Native American tribes that the agency terminate probes of their companies for possible abuses of consumer lending laws. According to a September 26 story on Bloomberg news,CFPB Director Richard Cordray countered that Indian tribes, like individual states, are not immune from federal government investigations. The Bloomberg report also noted that several state attorneys general back Cordray's ruling, which gave the accused 21 days to respond to questions about their online payday loan businesses.
The CFPB began looking into online payday lenders that skirt the legal system last year, and published details about the industry and its initial findings in a white paper - Payday Loans and Deposit Advance Products - released in April. Many payday lenders have taken their businesses online in response to state usury laws which they seem to believe apply only to lenders with physical offices in those states.
Payday lending - both online and at brick-and-mortar locations - has become a booming business. According to Stephens Research, a division of Stephens Inc., Little Rock, AR, the total number of payday lenders nationwide grew 10-fold (from about 2,000 to 20,000)between 1996 and 2010.
National People's Action, a confederation of grass-roots groups, released a report last year - Profiting from Poverty: How Payday Lenders Strip Wealth from Working-Poor for Record Profits - in which it estimates that payday lenders collect about $4.5 billion a year in fees from borrowers.
In its white paper, the CFPB reported that the median income consumers with payday loans is $22,476. The median loan was for $350, was outstanding 14 days and cost $15 per $100 borrowed.