Caught on the wrong side of the line: an examination of the relationship between the payday loan industry and American Indian tribal sovereignty.

• Author: Farley, Michael B.

1. INTRODUCTION II. BACKGROUND A. Payday Loan Companies 1. The Function of Payday Loans in the Lending Market 2. The Problems with Payday Loans 3. Recent Development in Responses to Payday Loans 4. Ways the Payday Loan Industry is Adapting B. American Indian Tribal Sovereignty and Immunity III. ANALYSIS A. Sovereign Immunity of Tribes B. The Payday Loan Industry's Relationship with Sovereign Immunity IV. RECOMMENDATION A. The Payday Loan Companies 1. Restructure the Payday Loan Business Model 2. Lobbying for Changes in States' Legislation B. The American Indian Tribes C. The Payday Loan Customers V. CONCLUSION "Down here it's just winners and losers And don't get caught on the wrong side of that line. " (1) --Bruce Springsteen

1. INTRODUCTION

   At first glance, payday loan companies and American Indian (2) tribes appear to have very little in common with each other. The former are companies that act similar to banks, while the latter are a set of over 500 indigenous cultural and governmental institutions whose status as such is recognized by the federal government. (3) The former are part of an industry that is currently experiencing a great deal of negative public backlash for some of their lending practices, (4) while the latter have been subject to a negative public view for hundreds of years. (5) However, after exploring the relation between the two groups, the discovery of their increasingly prevalent cooperation will seem less strange. This Note addresses the movement of payday loan companies onto tribal reservations, both physically and through incorporation, in order to avoid state interest rate cap laws and endangering the payday loan industry itself, the customers, and tribal sovereignty.

   In Part II, this Note will explore the current state of payday loan companies, their role in and effect on society, their contemporary public reception, and their standing among individual state usury laws. This includes recent legislative and judicial restrictions placed on payday loan operations in several states. This Note will also establish the basics of tribal sovereignty and immunity, two long-standing but often-misunderstood aspects of Indian law. Next, in Part III, this Note will examine the several recent and pending court cases that may affect or threaten the protection tribal sovereignty and immunity provides to payday loan companies operating within reservation borders. Lastly, in Part IV, this Note will recommend that a) for their own sake, payday loan companies should make an effort to act more ethically and customer-friendly; b) American Indian tribes should avoid close corporate coordination with payday loan companies and cut off any current ties from the industry for both social and legal reasons; and c) payday loan customers should become more aware of the true financial long-term costs of the short-term loans that they may feel they need to take out.

2. BACKGROUND

   Although "short-term loans" and "payday loans" are used synonymously in everyday speech--and often operate in similar manners--payday loans are actually a type of short-term loan. (6) Payday loans are typically defined as loans of no more than about $500 and are meant to be paid back relatively quickly. (7) As their name suggests, payday loans are meant to act as buffer money for an individual or family to supplement household income until the next paycheck arrives, at which point the recipient is required to pay back the loan. (8) However, this lending system has now seen interest rates reach four digits and thus has come under the scrutiny of several states. (9) To continue their business operations, some payday loan companies have relocated to Indian reservations or incorporated with tribes. The first half of this Part will focus on the payday loan companies and the second half will focus on American Indian tribes.

   1. Payday Loan Companies

      1. The Function of Payday Loans in the Lending Market

         In the free market, payday loans serve to fill a need of a demographic of people-- typically, but not always, the indigent--to whom traditional banks do not lend. (10) Payday loan apologists often claim that there is no lending alternative for people who cannot or do not want to receive a loan from a bank. (11) For example, an individual who has poor credit, is only in need of $100, or both, may find it difficult, if not impossible, to acquire a loan from a bank. (12) Payday loan companies then address the portion of consumers who want to enter the loan market but for whatever reason cannot obtain a loan from a bank. (13) This inaccessibility of loans from banks, whether real or perceived, (14) is furthered by recent strategies and advertising campaigns by payday loan companies that brand their market niche as accessible and convenient. (15)

      2. The Problems with Payday Loans

         Payday loans do serve a role in the lending market, and many people recognize, if not celebrate, the value of such accessible loans. (16) There are now payday loans that have interest rates over 1000% annually. (17) Even less extreme interest rates can still result in the customer paying the principal loan many times over by the end of the payment cycles. (18)

         Payday loan companies are able to charge interest rates significantly higher than traditional bank loans for several reasons. For a portion of the consumer base, a payday loan may be the only remaining option. (19) In the "Wild West" of the unregulated payday loan market, (20) these individuals' highly inelastic demand can cause the price (21) of payday loans to rise dramatically. (22) It is the astronomical interest rates (23) that payday loan companies charge, coupled with the fact that most of their customers become trapped in a loan-debt cycle, which spark much of the criticism of payday loan companies. (24) Payday loan companies have been accused of using tricky wording (25) and seemingly innocuous interest rates (26) to lure customers and then trap them in a cycle of poverty, forcing them to take out more loans in order to pay off the first. (27)

      3. Recent Development in Responses to Payday Loans

         Legislation serves as the basis through which states can enact policies to address the social costs of payday loans. (28) The legislative process is an effective method when situation has been brought to the state's attention--a loophole in the banking code has been exposed or a situation arose to which state laws did not legally extend. (29) As of October 2015, 18 states and Washington, D.C. have outlawed payday loans outright. (30) Some legislation is reactionary to the outcome of court cases, enacted to address or supplement a recent court ruling. (31) Most banking regulations that affect payday lenders lie within state jurisdiction, so this structure creates a hodge-podge of statutes, regulatory schemes, and requirements that blanket the country. The fact that most banking regulations vary from state to state--there are few federal laws that regulate payday lender operations--allows payday loan companies to skirt the threshold of the law, finding new methods of attracting customers and issuing loans that have not been restricted or outright prohibited. (32)

         Customers have brought lawsuits against the payday loan companies, with complaints ranging from not providing required information (33) to illegal terms and interest rates. (34) Although this Note will not cover the success rates of particular fields of claims brought against payday loan companies, the general trend shows that plaintiffs are becoming more likely to win their case. (35)

         Litigating against payday loan companies has become a state affair. (36) In place of individual or class-action suits, states or state agencies have brought lawsuits against payday loan companies. (37) For example, Connecticut's Department of Banking brought a lawsuit against Cash Call, one of the largest payday loan companies in the country, for preying on vulnerable citizens and issuing bonds with interest rates that exceeded the state maximum. (38) In this instance, the Department of Banking was successful: although the Department of Banking settled out of court with Cash Call, the payday loan company agreed to set up a $4.5 million restitution fund to pay back the Connecticut consumers the interest they were charged above Connecticut's cap of 12%. (39)

      4. Ways the Payday Loan Industry is Adapting

         State usury laws vary across the nation, but there is no doubt that state legislatures and agencies increasingly regulate payday loan companies, most commonly (and most effectively) through interest rate caps and other usury laws. (40) In the face of greater regulations, payday loan companies have looked for new methods that allow them to continue operating in as close a manner to the "good old days" as they can. (41) The best solution the industry has come up with for the time being is cooperating with American Indian tribes, by either incorporating with current companies on reservations or by merging with tribal companies. (42)

         The flight of payday loan companies to tribal lands is not all that surprising, given the payday loan industries past ability to adapt to changing market and legislative trends. (43) In the 1990s, stricter legislation (seemingly a reaction to the laissez-faire atmosphere and regulation of Wall Street and the financial sector in the 1980s) (44) forced many payday loan companies to adopt the practice known as "hire-a-bank." (45) This practice was just as it sounds. Payday companies would hire a local bank that complied with all state regulations and continue to issue high-interest, short-term loans through that bank to its same customers. (46) Further legislation, most notably interest rate caps, eliminated the "hire-a-bank" option for payday loan companies. (47)

         Around the same time the "hire-a-bank" scheme was being regulated out of practice, the Internet became increasingly popular, user-friendly, and capable of hosting business ventures. (48) By...