As the Consumer Financial Protection Bureau takes a visibly lenient approach toward payday lenders, legal experts also see a softer stance on lenders claiming sovereign protection from affiliation with Indian tribes.
In one of his first actions as acting CFPB director, Mick Mulvaney voluntarily dismissed a lawsuit against Golden Valley Lending and three other payday lenders owned by the Habematolel Pomo of Upper Lake tribe, near Sacramento, Calif. The move followed the agency's announcement that it would reconsider the CFPB rule cracking down generally on the payday loan industry.
Last year, the agency under former Director Richard Cordray had alleged that the four lenders engaged in "unfair, deceptive, or abusive acts or practices" by collecting on loans voided by state usury and licensing rules. The CFPB argued the linkage between those lenders and the tribe was not sufficient to provide the same exemption from state laws afforded to other tribal lenders.
But observers say Mulvaney's decision signals a more liberal interpretation of such linkages, paving the way for payday and installment lenders affiliated with Indian tribes to receive far less scrutiny.
Several lawyers said dropping the case made sense because the four lenders were not a front for another outside company.
"There is zero basis to attack legitimate tribal lending operations under existing law and the lawsuit was frivolous in that regard," said Richard Gottlieb, a partner at Manatt, Phelps & Phillips.
The CFPB did not give a reason for dropping the lawsuit, which had also targeted Silver Cloud Financial, Mountain Summit Financial, and Majestic Lake Financial. Last month, the CFPB specifically stated in its strategic plan that the bureau will not interfere with tribal sovereignty, in yet another indication that Mulvaney has ended his predecessor's practice of "regulation by enforcement."
The move seems to revise the agency's view on whether lenders are truly affiliated with tribes or are merely claiming such affiliation to avoid state licensing and interest-rate rules.
The question of such tribal affiliations has come up before. The CFPB under Cordray had targeted CashCall, an Orange, Calif., nonbank lender affiliated with the now-defunct Western Sky Financial, owned by the Cheyenne River Sioux tribe. A judge had ruled that Western Sky did not enjoy tribal sovereign protection since CashCall was the "true lender." Still, the CFPB's request for $280 million in penalties against CashCall was rejected; the CFPB could impose only a $10.2 million fine and zero in relief for consumers.
In the Habematolel Pomo of Upper Lake tribe case, the CFPB similarly claimed the tribe had no lending storefront on tribal land and ran its operations out of a call center in Overland Park, Kansas. The tribe had purchased the call center in 2013.
Yet in a legal brief, the tribe described the four lenders that the CFPB filed suit against as "economic development arms of the tribe."
"The tribal Lenders are all arms of the tribe and headquartered on the tribe’s reservation," the brief stated. "They extend credit over the Internet. All loan agreements entered into between the tribal lenders and any consumers clearly state that the loans are originated on tribal lands and governed by tribal law."
Mulvaney has taken heat for pledging to reconsider the agency's small-dollar payday lending rule, and for dropping a lawsuit against World Acceptance Corp., a Greenville, S.C., installment lender that had made campaign contributions to a political action committee when Mulvaney was a South Carolina lawmaker.
Some analysts and lawyers think Mulvaney's ties to payday lenders prompted the agency's course reversal, even though he casts the shift as core to the Trump administration's efforts to roll back regulations and increase credit.
In a speech earlier this month, Mulvaney said he dropped the Golden Valley lawsuit because state attorneys general had sided with the defendants. Two states, New Mexico and Oklahoma, supported dismissing the lawsuit. They argued that the CFPB's authority should not extend to tribal sovereignty questions.
A legal brief by the New Mexico attorney general's office stated: "If the CFPB’s position is validated, the bureau will have both regulatory and investigative power over states and tribes."
The Golden Valley case also stands out because the Habematolel Pomo of Upper Lake tribe had created its own loan origination platform, as well as an independent commission that conducted exams and had the power to impose fees and revoke licenses.
The CFPB lawsuit had said Golden Valley loans carried annual percentage rates ranging from 440% to 950%, and for each installment payment a consumer paid a service fee of roughly $30 for every $100 of principal owed, and 5% of the original principal. The CFPB alleged that for an $800 loan, the consumer would end up paying $3,320 over 10 months.
Yet tribal lending advocates say the industry is unique since tribal governments that own online lenders use the profits to fund essential government services like cemeteries, health care and scholarships, said Sarah Auchterlonie, a partner at Brownstein Hyatt Farber Schreck in Denver, and a former acting CFPB deputy enforcement director.
Online lending is one of the few areas, along with gambling, in which tribes have been able to raise revenue and create jobs, she said.
"The Dodd-Frank Act could do a much better job of clarifying that government-owned financial services are not 'covered persons' under the CFPB’s jurisdiction," Auchterlonie said.
But she and other lawyers claimed the CFPB under Cordray disproportionately devoted resources to tribal lending investigations as part of a crackdown on high-cost loans, filing lawsuits and launching investigations against service providers and lead generators in an effort to stop tribal lending altogether.
The CFPB alleged that lenders like Golden Valley engaged in unfair, deceptive, or abusive acts or practices by trying to collect on loans in states where the loan's interest rate exceeds state usury caps. Currently, at least 17 states have usury caps.
"The theory is that the loan is void or voidable under state law and so when a lender tries to collect, they commit a UDAAP violation," said Maria Earley, a partner at Reed Smith. "Where the debate is, is that tribal governments and years of case law view tribal authority as on par with the states. But the CFPB said, no, we don't agree and we are now going to pursue you on this theory of collecting voidable loans."
Meanwhile, the CFPB is prohibited from establishing a federal usury limit. That has prompted tribes, service providers and lead generators, which have been targeted by the bureau, to question whether the CFPB can assert its authority on the issue of tribal lending.
Tribes are hopeful that the CFPB under Mulvaney is recognizing the distinction between tribal lenders that operate their own loan origination platforms and so-called "rent-a-tribe" schemes, in which an Indian tribe essentially serves as a front for a lender, lawyers said. In one such high-profile scheme, Scott Tucker was sentenced to more than 16 years for claiming connections to an Oklahoma tribe to avoid state licensing and usury laws.
"The [CFPB] enforcement division's tribal lending theories might be on the verge of refining [and] distinguishing between true sovereign lenders and the rent-a-tribe schemes that men like Scott Tucker ran," Auchterlonie said.