When Benjamin Lawsky, New York State's Superintendent of Financial Services, sent a letter earlier this week to 35 online lenders, instructing them to "cease and desist" from offering loans that violate local usury laws, an interesting fact jumped out: several were Native American tribes or affiliated with tribes.
Consumer advocates are accusing some online lending firms of using Native American tribes as shields to skirt state rules, and regulators are listening.
"Companies are using claims of tribal immunity from state and federal laws to evade consumer protections," says Tom Feltner, director of financial services at the Consumer Federation of America. "We view this as a growing problem."
Feltner says a company will list a tribal disclosure but bury its alliance at the bottom of the website. "This poses several consumer challenges," Feltner says. "We are very concerned that today it is payday loans but it could be other financial services products down the road."
Banks are directly affected — the New York State Department of Financial Services has asked banks to "choke off" ACH access to online lenders that charge interest rates that violate state limits.
The FDIC has weighed in on the matter. "Based on specific facts and issues, we may work collaboratively with other regulators and law enforcement as appropriate to ensure banks are effectively managing relationships with payment processors and higher-risk merchants, such as payday lenders," writes Andrew Gray, spokesman of the FDIC, to BTN.
"I think the writing is on the wall," said Alan Kaplinsky, partner at Ballard Spahr, in an e-mail to BTN. "Online lenders who fail to comply with applicable state laws in the borrowers' states are going to be under siege from not only state attorneys general and departments of banking but more importantly the Department of Justice, the Federal Trade Commission and the CFPB. By focusing on the banks that provide access to the ACH system, the Feds have figured out a potentially more effective way of dealing with the problem than bringing enforcement actions against hundreds of online payday lenders."
Kaplinsky adds that he does not think the regulators have any problem with the online payday lenders that comply with state laws in the borrowers' states.
Smaller short-term, high-interest loans, once the purview of storefront payday lenders, are increasingly obtained by people clicking a few buttons online or tapping their mobile devices to get quick access to funds.
The volume of online lending grew to $18.6 billion in 2012, according to data compiled by John Hecht, a research analyst at investment bank Stephens Inc. The growing shift to digital has caused a rift among the market's participants: originators are following different rules and regulation depending on, among other things, their physical location.
Certain states restrict the ways payday loan companies can issue their products, such as by limiting the amount of loans they can give to borrowers or setting interest rate caps; however, not every company is following them. One such group arguing exemption from the rules are Native American tribes, who have sovereign immunity and offer online lending to people across the country as a means to gain economic benefits.
The ongoing issue, which Attorneys General in the states of Colorado and Minnesota, among others, have focused on, has made its way slowly but surely into the courtroom. A magistrate court ruled in mid-July that the Federal Trade Commission has authority over payday lending companies, regardless of their tribal affiliations, and that all are subject to the Federal Trade Commission Act, the Truth in Lending Act and the Electronic Fund Transfer Act.
"The FTC is saying enough is enough," says Lawrence Kaplan, of counsel at Paul Hastings LLP. "It's a wakeup call."
The Native American Financial Services Association [NAFSA], an association formed in 2012 to advocate on behalf of and protect Native American sovereign rights, declined to speak to the recent ruling, telling Bank Technology News it's not its practice to comment on other organizations.
"We will say that our members are required to abide by a stringent set of best practices that ensure consumers can trust NAFSA members to honor their rights, protect their privacy, treat them fairly, and constantly strive to offer them innovative alternative financial products. We promote the utmost in transparency and rigorously enforce these practices to ensure our members are the best actors in the business," said Barry Brandon, executive director of NAFSA, in a statement to BTN.
On its website, the association highlights the rules tribes should consider as guidelines for best practices, including the Truth in Lending Act and Equal Credit Opportunity Act.
Tribal-affiliated lending is one of several areas of online lending getting added scrutiny from regulators. Consumer advocates are closely watching lead generation companies and offshore operations.
The Consumer Financial Protection Bureau continues to look at a wide range of payday lending issues that could harm consumers, including the growing presence of online payday loans. The Bureau has said federal consumer financial law applies to all payday loans.