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From Banking and Finance Law Daily, October 3, 2014

New York payday loan ban applied to Native American tribes

By J. Preston Carter, J.D., LL.M.

The New York state ban on payday loans did not violate the Indian Commerce Clause, the U.S. Court of Appeals for the Second Circuit has decided. A lower court properly denied a preliminary injunction to two Native American tribes where New York state was attempting to prevent them from offering payday loans with interest rates that exceeded caps imposed by state law (The Otoe-Missouria Tribe of Indians v. New York State Department Of Financial Services, Oct. 1, 2014, Lynch, Circuit Judge).

New York’s usury laws prohibit unlicensed lenders from lending money at an interest rate above 16 percent per year, and criminalize loans with interest rates higher than 25 percent per year. The Native American tribes, tribal regulatory agencies, and companies owned by the tribes provided short-term loans over the Internet, all of which had triple-digit interest rates. When the New York State Department of Financial Services (DFS) tried to bar out-of-state lenders, including the tribes, from extending loans to New York residents, the tribes sought a preliminary order enjoining DFS from interfering with their consumer lending business.

Trial court results. The tribes contended that New York had projected its regulations over the Internet and onto reservations in violation of Native Americans’ tribal sovereignty, protected by the Indian Commerce Clause of the Constitution. However, the district court held that the tribes had not offered sufficient proof that the loans fell outside New York’s regulatory domain. According to the district court, the tribes failed to establish that the challenged loan transactions occurred on Native American soil (see Banking and Finance Law Daily, Oct. 2, 2013).

Location. In order to “weaken New York State’s regulatory authority over them,” the appellate court said, the tribes had to establish that the challenged loan transactions occurred on Native American soil. The lenders asserted that the transactions occurred on reservations.

The lenders stated that the “loan application process” took place via “website[s] owned and controlled by the Tribe[s].” Loans were “reviewed and assessed by … Tribal loan underwriting system[s].” Loans complied with rules developed, adopted, and administered by tribal regulatory authorities. The loans were funded out of “Tribally owned bank accounts.” And each loan application notified borrowers that the contract was “governed only by the laws of [the Tribe] and such federal law as is applicable under the Indian Commerce Clause of the United States Constitution … [and] [a]s such, neither we nor this Agreement are subject to any other federal or state law or regulation.”

However, the appellate court pointed out that the loans approved on Native American reservations and other out-of-state locations flowed across borders to consumers in New York. New York borrowers never traveled to tribal lands or other jurisdictions; they signed loan contracts remotely by keying in an electronic signature. Borrowers listed their New York addresses on applications, and provided lenders with routing information for their personal bank accounts in New York.

The lenders did more than simply transfer loan proceeds into New York bank accounts, the court determined. Under the terms of the loans, the court said, the lenders reached into New York to collect payments. The lenders placed a hold on borrowers’ accounts that resulted in an automatic debit every two weeks over the course of many months. The court stated that the harm inflicted by these high-interest loans fell upon customers in New York. In fact, the DFS received complaints from residents that the tribes’ interest rates were as high as 912.49 percent.

Payday lending curbs in the public interest. District courts can grant a preliminary injunction where the plaintiff demonstrates “irreparable harm” and shows either a likelihood of success on the merits or sufficiently serious questions going to the merits of its claims to make them fair ground for litigation. However, the appellate court noted that a plaintiff cannot rely on the “fair-ground-for-litigation” alternative to challenge governmental action taken in the public interest pursuant to a statutory or regulatory scheme. The court concluded that the DFS’s attempt to curb online payday lending in New York was a “paradigmatic example” of governmental action taken in the public interest. Therefore, the court stated, the tribes would have to establish a likelihood of success on the merits to win injunctive relief.

Likelihood of success on the merits. The appellate court said the tribes had to demonstrate that the challenged transactions occurred somewhere other than New York, and, if they occurred on reservations, that the tribes had a substantial interest in the lending businesses.

Although the court recognized that “Loans brokered over the internet seem to exist in two places at once,” it concluded that the tribes “provided insufficient evidence to establish that they are likely to succeed in showing that the internet loans should be treated as on-reservation activity.”

Furthermore, the court could not determine that the tribes had a substantial interest in the lending businesses. The record contained no information about the nature or extent of resources invested in the businesses.

Tribal sovereignty. Finally, the court rejected the tribes’ claim that the DFS infringed upon tribal sovereignty by launching a “national campaign” with the “express purpose of destroying out-of-state tribal businesses.” Letters sent by the DFS to banks and the Automated Clearing House (ACH) to cooperate to “stamp out these pernicious, illegal payday loans,” were not, the court concluded, requests that ACH and banks stop processing payday loans made to New York customers. Moreover, the force of the request “fell upon parties located far from a reservation, on financial institutions that plaintiffs themselves claim are indispensable outside partners.”

The appellate court concluded by stating that, with the benefit of discovery, the tribes may present evidence that will allow them to prevail; however; “at this stage, the record is still murky, and thus, the District Court reasonably held that plaintiffs had not proven that they would likely succeed on the merits.”

Center for Responsible Lending response. The Center for Responsible Lending called the decision an “important reaffirmation of states’ interest rate limits to effectively prevent predatory lending…The decision strikes the right balance between respecting both tribal sovereign immunity, and states’ interest in alleviating poverty and preventing illegal activity within their borders.”

The case is No. 13-3769-cv.

Attorneys: David M. Bernick (Dechert LLP) for The Otoe-Missouria Tribe of Indians, Great Plains Lending, LLC, American Web Loan, Inc., Otoe-Missouria Consumer Finance Services Regulatory Commission, Lac Vieux Desert Band of Lake Superior Chippewa Indians, and Red Rock Tribal Lending, LLC.

Companies: American Web Loan, Inc.; Center for Responsible Lending; Great Plains Lending, LLC; Lac Vieux Desert Band of Lake Superior Chippewa Indians; Otoe-Missouria Consumer Finance Services Regulatory Commission; Red Rock Tribal Lending, LLC; The Otoe-Missouria Tribe of Indians

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