A U.S. District Court has ruled in favor of the Consumer Financial Protection Bureau in a dispute over lending by Indian tribes. Although the lender, Western Sky Financial, is based on an Indian reservation and owned by a tribal member, the Court found that a third party, CashCall Inc., was the “true lender” behind the transactions at issue. That means that tribal lenders cannot claim federal exemption from state laws, and that CFPB jurisdiction now extends to tribal lenders financed by third parties.
Some Indian tribes, particularly impecunious tribes without sufficient traffic to engage profitably in casino gambling, have found much-needed revenue from consumer lending over the internet. In a typical model, the tribe forms a tribal lending entity (TLE) that is financed by a third party. The TLE then makes loans over the internet to consumers nationwide, usually on terms that are unlawful under the internal laws of the states where the borrowers reside. Because the TLE is deemed an “arm” of the tribe, the TLE benefits from the tribe’s sovereign immunity. As a result, the TLE may be sued only under very limited circumstances; and, perhaps even more importantly, the TLE is exempt from most state-court discovery intended to unearth the economic relationship between the TLE and its non-tribal financier.
Because this model has, at least to date, provided a relatively bulletproof means to circumvent disparate state consumer-protection laws, the model has attracted internet-based payday lenders. Although data are spotty, some in the industry suggest this is the fastest-growing model for unsecured online lending. Tribal sovereign immunity renders this model the preferred legal structure for online lenders desirous of employing uniform product pricing and terms nationwide, including for loans to borrowers who reside in states that prohibit such lending entirely.
The Court, however, held that regardless of ownership or location, CashCall bore the risk when it serviced the loans and consequently is subject to all of the state laws in the states where it did business, including licensing requirements, any cap on interest rates and restrictions on collecting debt from consumers.
“The Court concludes that the entire monetary burden and risk of the loan program was placed on CashCall, such that CashCall, and not Western Sky, had the predominant economic interest in the loans and was the ‘true lender’ and real party in interest,” stated the Court.