How a High Court Ruling on Tribal Powers May Impact Payday Lending

WASHINGTON — A recent Supreme Court ruling concerning a tribal casino and state authorities has sparked a debate about whether the decision could extend to curtailing payday lenders that claim their affiliation with Native American tribes frees them from state and federal consumer protection laws.

Although the case did not directly deal with payday lending, the ruling — which upheld tribal sovereignty in the case of a casino — specifically mentioned possible limits to tribal authority by suggesting states could instead pursue individuals. Some consumer advocates said the decision will make it harder for payday lenders to defend themselves by relying on tribal sovereignty.

"This case makes clear that sovereign immunity is only immunity from being sued but they are not exempted from complying with the law," said Lauren Saunders, associate director of the National Consumer Law Center. "Payday lenders who claim an affiliation with a tribe claim that they are outside of law" but "that is simply wrong and this says a court can even issue an order against them by doing it through action against an individual."

Yet industry lawyers argue the decision does not go that far and instead reiterates existing law.

The NCLC view "reflects significant overreaching in seeking to extrapolate from this Supreme Court decision," said Andrew Sandler, chairman and executive partner of BuckleySandler LLP. "The decision focuses on a gambling statute and the reach of the state to individuals off tribal property only. It is less than clear how this decision applies to online tribal-affiliated lending activities or related enforcement by the Consumer Financial Protection Bureau or state agencies."

At issue is a lawsuit between the state of Michigan and the Bay Mills Indian Community, which built a casino that was located off of its reservation but on land it purchased through a congressionally established land trust. While the state claimed it did not have sovereign immunity, the Supreme Court disagreed, upholding those powers.

The majority opinion, delivered by Justice Elena Kagan, made no mention of payday lending. But consumer advocates pointed to a specific cite of payday lending in a dissenting opinion authored by Justice Clarence Thomas. He wrote that tribal protection have created problems for state authorities and suggested that states could use other "mechanisms" like charges against individuals to circumvent sovereignty claims.

"Tribal immunity has also been exploited in new areas that are often heavily regulated by states," wrote Thomas in an opinion released on May 27. "For instance, payday lenders (companies that lend consumers short-term advances on paychecks at interest rates that can reach upwards of 1,000 percent per annum)often arrange to share fees or profits with tribes so they can use tribal immunity as a shield for conduct of questionable legality."

Still, industry experts argue it's unclear whether the ruling can be used in cases concerning tribes and affiliated payday lenders.

Last year, several tribal-affiliated online payday lenders tried to block a civil investigation by the CFPB claiming that they were protected from complying with federal law. CFPB Director Richard Cordray rejected their request (made through the agency's internal process), saying they did not have sovereign immunity when it came to federal law and noting that they believed the business was being conducted off reservation.

More recently, U.S. District Judge Gloria Navarro ruled May 28 that AMG Services deceived customers by not disclosing certain fees after previously ruling that the payday lender could not use its tribal affiliation to shield itself from federal enforcement.

"Not many people are arguing that tribal affiliation gives businesses blanket immunity to violate state laws when they're not on tribal territory," said Ronald Rubin, a partner at the Hunton & Williams' Washington office. "The real question is whether or not payday lenders located on Indian lands are actually operating on tribal territory when they make loans to people around the country."

The Supreme Court decision for Bay Mills reaffirms sovereign immunity from states suing tribes over certain activity off the reservation. However, a key point of the ruling says states can still take other enforcement actions against individuals, which could impact affiliated parties like payday lenders or payment processors. For example, there is a case pending before the Second Circuit Court of Appeals in New York in which the Otoe-Missouria Tribe of Indians is suing the state's financial regulator in order to stop it from going after banks that are processing payments for online payday lenders.

"They claim that sovereign immunity prohibits the state from going against other businesses unrelated to tribes, where this interferes with a tribally affiliated business. That argument should fail in light of the Supreme Court decision in Bay Mills," said Ellen Harnick, senior policy counsel at the Center for Responsible Lending. "The Supreme Court expressly said that while states may not be able to bring a tribe to court, they can take other actions to stop illegal activity, even where a tribe is involved."

Jeremy Rosenblum, who leads the consumer financial services group at Ballard Spahr, said that while the Bay Mills case does not drastically change the regulatory landscape for online payday lenders it "does telegraph ways that opponents of tribal lending could attack tribal lending programs without suing tribes entitled to immunity."

"But this says absolutely nothing about the lawfulness of online payday lending when that lending is conducted from a reservation, which it usually is," he said. "The game is not up for payday lenders."