WHAT'S A PAYDAY LOAN?
• A payday loan is a short-term, unsecured, high-interest loan.
• In Tennessee, lenders can charge $15 for a $100 loan.
• The loan is typically due within two weeks, or on the next payday. Hence the name payday loan.
• If borrowers pay back the loan immediately, it can be a good way to avoid missing a car or a house payment.
• But many borrowers let the loans roll over, only paying the interest and penalties and generating "churn," which is how lenders make much of their money.
• Many lenders prefer it this way, leaving the originally borrowed amount in the account and only debiting the interest every two weeks.
• Lenders say they must charge the high interest rates because the high-risk borrowers are typically operating on the margins of society and outside traditional banking systems.
• Opponents say the system traps its victims in a cycle of debt that leaves them worse off than when they started.
• Recent actions by regulators have cut off some payday lenders' ability to reach into consumers' bank accounts as punishment for those lenders ignoring state limits on interest rates.
Source: Center for Responsible Lending, State of New York, news reports
In a parallel to the 1970s-era battle over the legal right of Indian tribes to open casinos in contravention of state laws, a new generation of online payday lenders are now suing for the same type of immunity from state lending regulations, hoping to dodge rules limiting interest rates.
"This is a straightforward case that is about the real-world importance of Native American sovereign rights," said David Bernick, an attorney working for two tribes to stop regulators in their tracks.
Recent actions by the states have challenged tribes' ability to flout lending laws by leaning on the banks that control the nationwide banking network to choke off payday lenders' ability to electronically deposit and withdraw money from customers' accounts.
Lenders maintain that they are offering a service that customers demand, while regulators say that lenders' methods end up costing consumers far more than they bargained for, trapping them in a cycle of debt that enriches lenders but leaves customers worse off than when they started.
Ben Lawsky, head of the powerful New York Department of Financial Services, convinced banks to shut off access to the automated clearing house (ACH) network for rule breakers, else the banks could be held responsible for abetting illegal behavior.
Lawsky's plan to stem the flow of "illegal" payday loans into New York worked, and banks began to cut access to the banking network payday lenders like Chattanooga's Carey V. Brown, forcing Brown to shut down his websites within weeks and lay off most of his employees.
But the tribes, some of which have partnered with Brown in the past, are unhappy about the loss in revenue, and charged that Lawsky was creating a constitutional backdoor that flies in the face of established rulings granting tribal businesses the right to ignore state laws.
"Lawsky knows that he doesn't have the authority to regulate and limit tribes' sovereignty, which is why the Department of Financial Services has instead gone after tribes' banking relationships," Bernick said.
Two tribes filed a lawsuit on Aug. 21 against Lawsky, asking for an injunction against what they called unlawful intimidation. On Monday, a judge expedited the case, forcing Lawsky to respond by Friday to the tribes' motion for a preliminary injunction.
"Lawsky and the state of New York have overstepped their bounds with their illegal attacks on our tribes," said Barry Brandon, executive director of the Native American Financial Services Association. "His actions are a flagrant denial of our rights as sovereign entities, and today, we are fighting back to defend these rights."
Legally, the relationship between tribal businesses, the federal government and the 50 U.S. states has been a complicated one. Courts have held that states have almost no power to enforce their laws when it comes to Indian businesses, leaving a patchwork of federal regulators as the tribes' only governing authority.
Taking advantage of this loophole, Indian tribes over the last few years have partnered with existing online payday lenders, offering lenders the tribe's legal immunity in exchange for payments that support schools, playgrounds and other infrastructure. While the payday lending businesses must be technically owned by a member of a federally-recognized tribe, a Times Free Press investigation found that in some cases, the website's operations are actually outsourced to existing payday lenders.
Cheryl Bogue, an attorney for one of Brown's former Indian business partners named Martin "Butch" Webb, told the Times Free Press that the tribes "outsource to people like Mr. Brown" because of insufficient bandwidth on the reservation, among other difficulties.
Payday lending has been an especially attractive opportunity for tribes too far off the beaten path to make a casino a feasible source of revenue, as well as for lenders who are looking for a safer and more legally defensible way to make their short-term, high-interest loans over the Internet.
Allen Parker, a consultant who sets up deals between online payday lenders and Indian tribes, said that payday lenders will typically pay a lump sum to the tribe in exchange for the tribe's immunity from state law, then send in recurring payments as sort of a profit-sharing plan.
"It works better if the tribe owns it 100 percent, then they contract with the payday loan companies to run the businesses," Parker said. "In return, the payday loan companies pay a fee portion of revenues it collects."
The arrangement works well for both sides.
For some tribes, lending revenues constitute more than 25 percent of the money they take in for education, health care, elder care and justice operations, according to the Native American Financial Services Association. And for lenders, the deal has allowed them to offer consumers access to easy money with interest rates that would get a brick and mortar store shut down.
Gary Kalman, executive vice president for federal policy at the Center for Responsible Lending, said the solution to the impasse between states and tribes is for federal authorities to step forward and more aggressively enforce federal laws. The newly-created Consumer Financial Protection Bureau could play a leading rule in standardizing the rules that govern lending in all 50 states, in tribal territories, and online.
"State laws are working, but all Americans deserve protection from abusive payday loans," Kalman said. "The CFPB should look to states for tested models of effective laws as they develop rules that will protect families nationwide."
Contact staff writer Ellis Smith, firstname.lastname@example.org, 423-757-6315.
Ellis Smith joined the Chattanooga Times Free Press in January 2010 as a business reporter. His beat includes the flooring industry, Chattem, Unum, Krystal, the automobile market, real estate and technology. Ellis is from Marietta, Ga., and has a bachelor’s degree in mass communication at the University of West Georgia. He previously worked at UTV-13 News, Carrollton, Ga., as a producer; at the The West Georgian, Carrollton, Ga., as editor; and at the Times-Georgian, Carrollton, ...