A federal court has ruled that state regulators have the authority over online lenders that operate from Native American land.

The U.S. District Court for the Southern District of New York ruled Monday that the state can block payday lenders from making loans to state residents even when loans are originated from offices on tribal land. Judge Richard Sullivan denied a request for preliminary injunction filed by the Otoe-Missouria Tribe of Indians, arguing that the loans fall under the state's authority because they affect the state's residents.

"The undisputed facts demonstrate that the activity the State seeks to regulate is taking place in New York, off of the Tribes' lands," Sullivan wrote in the opinion.

In August, Benjamin Lawsky, the superintendent of New York's Department of Financial Services, sent cease and desist letters to 35 companies that offer online loans in New York, threatening them with legal action if they continued making loans to New Yorkers. Lawsky's office claimed that the companies' loans violated New York's 16% usury cap.

At the same time, the DFS asked for the assistance of the National Automated Clearing House Association, as well as 117 banks and payday loan programs, in cutting off the payday lenders' access to the ACH network. Following the crackdown, several payday lenders with tribal ties shut down, citing their inability to access the payments network.

The case was filed in August by a group of federally recognized Indian tribes in Oklahoma and Michigan, who sought to permanently prevent New York from interfering with their online-lending business, arguing that the DFS' action is a violation of their territorial sovereignty as granted in the Constitution.

The tribes also said that the regulator's actions would cripple their ability to provide their members with basic services. Online lending is one of the tribes' largest revenue streams and accounts for a large percentage of the tribes' budget for government services, they said.

"The State's aim is to protect New York consumers from predatory loans in New York, and the detrimental effect of the enforcement action on the Tribes is merely a collateral consequence of the laws' goal," Sullivan wrote.

New York's regulators have been the most active of any state's in seeking to curtail online lending that violates the interest rate cap. On Monday, New York Attorney General Eric Schneiderman ordered five firms that collect debt for payday lenders to reimburse borrowers and cease their efforts to collect on their loans.

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