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How lucrative are "check cashing" businesses? Pretty lucrative, but states are increasingly regulating these bank-like industries that charge extremely high interest rates. Enter the Indian tribes! Payday lenders are teaming up with Indian tribes to utilize tribal sovereignty as an end-run around state usury laws, which the lenders claim don't apply to loans made on tribal land. As a result, the legality of these operations is a serious question. From Minnesota to California, states are cracking down on these tribal lending operations.
Yesterday, the Second Circuit Court of Appeals dealt a bit of a death blow to a New York-based Indian payday lender.
Sovereignty for Payday Loans
The Otoe-Missouria Tribe of Indians and the Lac Vieux Desert Band of Lake Superior Chippewa Indians formed an Internet-based lending company. Of course, being that they're payday lenders, they charged a lot of interest -- as high as 912 percent, a violation of New York's usury laws, which don't allow unlicensed lenders to charge more than 16 percent annually and which criminalize interest rates higher than 25 percent.
The Indians said that, in fact, New York had no authority to regulate their business, which was situated on tribal land and protected by the Indian Commerce Clause of the Constitution. All the relevant planning, underwriting, and administration happened within the tribes' sphere of influence.
That might be, said the Second Circuit, but "loans approved on Native American reservations and other out-of-state locations flowed across borders to consumers in New York." And once those loans leave sovereign Indian territory, other regulators else can get involved.
You're Off the Reservation
The major factual question was "who a regulation targets and where the targeted activity takes place." In addition to questions about where the back-end activity takes place (the tribes never specified where their banks are or who manages their electronic infrastructure), the front-end activity of the borrowers takes place entirely in New York.
The tribes, of course, insist that this is a Web 2.0 world where old rules about commerce must give way to the disruptive forces of online commerce, which is what every business that doesn't want to comply with state regulation says these days. The court wasn't impressed and instead said this looked an awful lot like the old, analog case of a tribe selling tax-free cigarettes on the reservation in an attempt to get customers (and avoid state taxes on cigarettes): "Tribes profit from leveraging an artificial comparative advantage, one which allows them to sell consumers a way to evade state law."
Not contained within the case, but also noteworthy, is the degree to which tribes themselves can become the victims of lending companies who are, at the end of the day, using the tribes for little else than the legal loophole they afford. An Al Jazeera report about Indian payday lending in California noted that "little of the revenue that flows through these tribal businesses ends up in the rancheria or benefiting tribal members." So who benefits? Payday loan companies -- as always.