Payday lenders and Indian reservations

Rock formation with sage brush in foreground in Monument Valley, Utah, on Navajo Indian Reservation

Scenic Monument Valley lies within the Navajo Indian Reservation on Utah-Arizona border.

Regulation of payday lenders on Indian reservations is a contentious subject. Regulation of payday lenders is complicated in the first instance by the fact that many lenders operate only online. Online lenders may make loans in several states without having a physical presence in any of them, which can make enforcement of state lending laws difficult. Payday lenders operating as agents of out-of-state banks can also be beyond the regulatory power of the state where they are located.

Sovereign immunity

Regulatory issues become even more complex when payday lenders are incorporated by tribal authorities or located on Indian lands. A payday lender’s association with an Indian tribe raises the question of whether, under the doctrine of sovereign immunity, the lender is exempt from the enforcement of state laws.

Most states regulate payday lenders

Most states now have specific laws pertaining to payday lenders. A few states, North Carolina for instance, have outlawed payday lending by directly banning the industry. Others, such as Vermont and West Virginia, have done so indirectly by setting maximum interest rates that are not conducive to payday lending. More typically, however, states regulate payday lenders by capping interest rates and fees, limiting deferral and default charges, restricting the number of loans that can be made to a borrower, establishing maximum loan amounts and terms, proscribing waivers of claims or defenses, mandating disclosures, and providing specific remedies for aggrieved borrowers.

Sovereign immunity precludes enforcement of laws

Generally speaking, absent congressional authorization or an express waiver of immunity, an Indian tribe cannot be sued in state court. Tribal immunity from suit can extend beyond the tribe itself to include a commercial enterprise such as a payday lender operating on behalf of the tribe, whether or not the enterprise is located on a reservation and whether or not the activity in question occurs outside tribal lands. Various kinds of state laws get started to Indian tribes and their businesses, but the sovereign status of tribal nations frequently precludes enforcement.

Immunity of payday lenders from state regulation

Questions about whether payday lenders associated with Indian tribes are or should be immune from state regulation have been asked in many states. Montana dealt with sovereign immunity issues in connection with a complaint about an online payday lender making unauthorized withdrawals from a borrower’s account. The lender, PDL Ventures, was created by the Chippewa Cree Tribe of Rocky Boy’s Indian Reservation and has been the subject of numerous complaints to the Montana Better Business Bureau. Authorities and aggrieved borrowers in Colorado, Washington, California, West Virginia, Oklahoma and Arizona have also grappled with issues concerning sovereign immunity as it applies to payday lenders.

Congress can enact legislation concerning Indian tribes

Congress has regulatory power over federally recognized Indian tribes, and in certain instances Indian nations and associated businesses may be sued in federal court. When it comes to regulating payday lenders, however, the issue is not whether state payday-lending regulations and similar consumer protection laws are preempted by federal law, but whether lenders are immune from actions to enforce state laws. States can and do demand that payday lenders associated with Indian reservations comply with their laws, but for the most part, both the states and aggrieved borrowers lack power to enforce compliance.

Borrowers may have rights without remedies

There is a difference between the right to demand compliance with state laws and having means available to enforce them. When it comes to complaints about payday lenders operating in association with Indian reservations, many borrowers have learned that lesson the hard way.