New York's top banking regulator has the power to regulate online lenders owned by Native American tribes, the U.S. Court of Appeals in New York ruled Wednesday.

The decision from the U.S. Court of Appeals for the Second Circuit comes more than a year after the tribes sued Benjamin M. Lawsky, superintendent of the state’s Department of Financial Services, arguing that he had overstepped his jurisdictional bounds in trying to regulate business activity that takes place place on Indian reservations in Oklahoma and Michigan.

Lawsky had ordered 35 online lenders, including at least four companies owned by tribes, to stop offering loans in New York that exceed the state's interest rate cap of 25%.  Federal regulators and many states have focused heavily in recent years on many players in the payday loan ecosystem.

Lawsky's office also had sent letters to Citigroup Inc., Bank of America Corp., JPMorgan Chase & Co and 114 others banks asking them to cut off the payday lenders critical access to borrowers' checking accounts.

The Lac Vieux Desert Band of Lake Superior Chippewa Indians in Michigan and the Otoe- Missouria Tribe, based in Oklahoma, sued Lawsky in an attempt to establish their right to sell high-interest online loans to New Yorkers. The tribes argued that their sovereign status shielded them from the reach of New York State.

The three-judge appellate panel disagreed, stating that the borrowers reside in New York and received the loans, "certainly without traveling to the reservation."

The decision is the latest setback for the Indian tribes. Last year, the Consumer Financial Protection Bureau rejected an argument from three Indian online lenders that argued their sovereign status protected them from an investigation by the agency.

The court did note that it was sensitive to the tribes' argument that lending profits fuel their growth, but said the plaintiffs did not establish that lending occurred "somewhere other than in New York" or "on reservations."

The court said the lenders may present such evidence as the case proceeds.

Robert Rosette, a lawyer for the tribes, said the ruling recognizes there is a strong trial interest in conducting these kinds of lending activities on Native American reservations. Rosette said the tribes will continue to pursue the lawsuit.

According to a Bloomberg New report, Rosette said, "The court said that the tribes might have it right and that it is essentially what we were seeking. We felt the lower-court decision was so wrong it completely ignored all the Indian law components of the evidence. There’s a complete body of federal Indian law when tribal interests are at stake, which was completely ignored by the lower court."

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