A federal judge has cleared the way for New York’s banking regulator to stop online lenders that operate on Native American land from offering short-term, high-interest-rate loans in violation of state law.
The ruling could encourage other states with interest rate caps to take legal action to ban tribal lenders that charge triple-digit rates in their jurisdictions. Native American groups say any such effort would infringe on their federal rights as sovereign nations.
On Monday, U.S. District Judge Richard Sullivan in Manhattan rejected a request by two Native American groups to block the New York Department of Financial Services, led by Benjamin Lawsky, from barring them from making loans to state residents.
The Otoe Missouria Tribe and Lac Vieux Desert Band of Lake Superior Chippewa Indians sued the state regulator in August after Lawsky demanded that 35 online companies cease making loans to New Yorkers. The state has a 16 percent interest rate cap in place for consumer loans under $25,000. At least one of the online lenders had been charging more than 1,000 percent in annual interest.
Sullivan agreed that Lawsky has authority over loans made over the Internet to consumers residing in New York, essentially stripping the Native American groups of their immunity from state law.
“The state’s action is directed at activity that takes place entirely off tribal land, involving New York residents who never leave New York state,” Sullivan wrote in the order. “These consumers are not on a reservation when they apply for a loan, agree to the loan, spend loan proceeds, or repay those proceeds with interest.”
Lawsky’s office declined to comment on the ruling.
The Native American groups plan to appeal the judge’s decision, according to their attorney, David Bernick.
“This ruling opens a clear and painful breach in the legal protection that has consistently been afforded to the tribes’ efforts to become self-sufficient and economically stable,” he said.
Advocates for tribal lenders say the federal court overreached in its decision and that only Congress has the authority to regulate Native American groups.
Jennifer Weddle, co-chair of Greenberg Traurig’s American Indian law practice, said tribal lenders have been swept up in state and federal efforts to clamp down on payday loans, which carry high interest rates and often feature onerous balloon payments.
A majority of the lenders that were cited by Lawsky, she said, offer installment loans with less harmful terms and repayment structures. Weddle said most of these lenders have established consumer protections in place.
“If New York regulators have concerns about the products that tribes are offering, they should work with the tribes to come up with some framework that works for everyone,” she said. “That’s what tribes and states do all the time with gaming contracts.”
Consumer groups have long been concerned about the ability of online lenders to circumvent state laws. Once states began introducing interest rate caps, some lenders migrated online or moved their operations offshore to sidestep laws. Other lenders began forging relationships with Native American groups to take advantage of their sovereign-nation status.
“By anybody’s measure, these loans well exceed reasonable interest rate limits,” said Ellen Harnick, senior policy counsel for the Center for Responsible Lending.