High-cost online lenders have long had a target on their backs, and there are finally signs that efforts to crack down on the industry are paying off.
The most recent example is a Dec. 22 decision by the California Supreme Court that could prove fatal to Native American tribes currently offering consumer credit in the state without a license. But even prior to that ruling, consumer advocates and their allies in state government had notched some key victories.
A report by the Center for Financial Services Innovation in November found that the online payday loan market shrunk by 22.5% between 2014 and 2015. The report projected that the sector would contract by another 9.9% over the next year.
"I think the tribal payday lending model is totally on the way out," said Lauren Saunders, associate director of the National Consumer Law Center. "It's clearly on its last legs."
Tom Dresslar, a spokesman for the California Department of Business Oversight, said that the number of actions the state has taken against unlicensed payday lenders has fallen over the last year or so. That would seem to indicate that unauthorized lending is on the decline in California, though Dresslar did not have data on the trend.
One key factor may be the role that search engine companies such as Google have taken in targeting high-cost lenders. Since July, the Mountain View, Calif., search giant has banned ads for loans with annual percentage rates of 36% or higher, or where repayment is due within 60 days.
Since April 2015, the state of California has been working with Google, Microsoft and Yahoo to block online advertising by unlicensed payday lenders in the Golden State.
Last month's California Supreme Court ruling involved a pair of Native American tribes that offered payday loans without a license, leaving them unconstrained by the state's interest rate cap.
Under a legal doctrine known as sovereign immunity, tribes have sometimes been able to get around state licensing requirements. Native American tribes often establish affiliated firms that make the loans, sometimes in partnership with other companies that are not owned by the tribe.
But the California court found that the Miami Tribe of Oklahoma and the Santee Nation of Nebraska exercised little control over the day-to-day operations of affiliated entities that made the loans. The court concluded that the affiliated entities were largely run by people who were not members of the tribes, and were not entitled to tribal sovereign immunity. It also laid out a detailed legal test for determining whether these sorts of business arrangements pass muster.
California officials hailed the decision as a landmark victory.
"This ruling is an important win for California's payday loan consumers," said Jan Lynn Owen, the commissioner of the California Department of Business Oversight, in a press release. "It strengthens our ability to enforce laws prohibiting excessive fees and unlicensed activity by denying payday lenders' ability to inappropriately use tribes' sovereign immunity to avoid complying with state law."
Gena Lankford, a representative of Miami Nation Enterprises, declined to comment on the ruling. Santee Financial Services did not immediately respond to a request for comment.
The two tribes are not members of the Native American Financial Services Association, a trade group representing tribal lenders that sought Tuesday to distance itself from the conduct at issue in the California case.
The trade group told American Banker in a written statement that its members "have overwhelmingly defeated several court challenges" and "are not reporting a downturn in volume."
Critics of online payday lending argue that fraud and abuse are widespread in the business, with the problems concentrated at unlicensed firms. Still, it has been a long slog for those who favor a crackdown.
Operation Choke Point, a Department of Justice-led initiative aimed at cutting off fraudsters' access to the banking system, had some initial success before encountering fierce political opposition. State officials have also struggled to combat firms that frequently change their corporate structures or use offshore addresses.
More recently, though, the Federal Trade Commission scored a $1.3 billion win in a lawsuit against payday lending mogul Scott Tucker and his companies.
Tucker, who is also a race car driver, was at the center of the California Supreme Court decision, too. The court found that Tucker and his brother Blaine "exercised a high degree of practical control" over the tribally affiliated online lenders.
California officials initially issued an order against the payday lenders in 2006, so it took a full decade for the matter to be adjudicated.
"Whenever you have a case that presents big issues that affect folks' financial interests, it's going to take a while to resolve," said Dresslar, the spokesman for the California Department of Business Oversight.