Short-term loans, known colloquially as payday lending, never fails to elicit a big response — if not always a consistent one. Foes of the practice point to the high double and triple digit annual interest rates and consumers swept into never-ending cycles of debt as proof of the inherent evil in the practice of offering fast, short-term, high-interest access to small amounts of cash. Friends of payday lending, on the other hand, point to the genuine need it serves and argue that far from being a tool to oppress the poor, it is more often used as a stopgap for working and middle class earners in a bind.
On the federal level, short term lending has drawn the attention of the CFPB. Currently, the consumer watchdog group has been considering rule changes that ratchet up federal legislation of the short term, small dollar borrowing space.
“Today we are taking an important step toward ending the debt traps that plague millions of consumers across the country,” CFPB Director Richard Cordray remarked at a Field Hearing on Payday Lending in Richmond, Virginia, earlier this year. “Too many short-term and longer-term loans are made based on a lender’s ability to collect and not on a borrower’s ability to repay. The proposals we are considering would require lenders to take steps to make sure consumers can pay back their loans. These common sense protections are aimed at ensuring that consumers have access to credit that helps, not harms them.”
State lenders, particularly over the last 15 to 20 years, have also been particularly active in looking to limit the excesses of payday lending; 18 states and the District of Columbia have laws that cap annual interest rates in double digits, limit the number of loans individual consumers can be given at once, or cap how much the loans can be for (either as a gross amount, or in some cases, as a percentage of a borrower’s overall income).
In the face of legislation, some short-term lenders complied with the law and stayed in business. Others went out of business or moved to different states when they could no longer profitably operate under the new guidelines. A third enterprising and creative group, on the other hand, came up with a way to maintain those triple digit APRs and stay in business by thinking out of the box.
And, according to reports from CNBC, The Financial Times, The Huffington Post and The LA Times (just to name a few) that out-of-the-box thinking is landing lenders squarely on Native American Reservations, where state laws don’t apply due to total unenforceability deriving from tribal sovereign immunity. It’s called “rent-a-tribe” and it’s been a popular loophole for payday lenders, according to reports.
But that popularity may be coming to an end, as state and federal prosecutors are taking a closer look at the practice of short-term lending on tribal lands. And, in a particularly interesting case filed in the Eastern District of Pennsylvania, the Department of Justice is taking a new approach to combat the high interest loans: they are not going after the tribe, or its sovereign immunity. Instead, the case is focused squarely on the tribe’s lending partners, and whether or not they are in violation of the Racketeer Influenced and Corrupt Organizations Act (RICO) — a statute that in the past has been used to great effect against the Mafia and Hells Angels.
How To “Rent-A-Tribe?”
“Rent-a-tribe” setups usually involve two parties — a small (couple hundred member), but legally established, Native American community and a non-native lending company that actually handles the entire financial part of the transaction. In some ways, the model is an update of a classic: “rent-a-bank.” About 20 years ago — when short-term lending laws began popping up on the state level — a method used by some lenders to bypass state regulations on payday was to pass their loans through a nationally chartered bank they were “partnered” with, thereby exempting them from state banking laws.
While “rent-a-bank” was popular in the late 90s, the 2000s saw a wave of legislators and regulators catching on, and by 2010 the process had been more or less stamped out through a variety of legislative actions.
Which brought many lenders into their next partnership with Native American tribes. And those partnerships were cemented and enshrined by the Supreme Court in 2014 with its 5-4 ruling in the Michigan v. Bay Mills Indian Community case.
That majority voted in favor of sovereign immunity for tribes that exempted them from state law and suit under state law, even when they were not operating on tribal land. The case was specifically about whether the state could enjoin the tribe from operating a gaming facility on non-Indian lands — and the court found the state could not.
As of 2015, about 25 percent of the $4.1 billion the online payday loan industry takes in each year goes to 30-or-so lenders based on reservations, according to Al Jazeera America.
The Wrong Side Of The Law?
As tribal lending has proliferated, so have attempts to hold them back, particularly at the state level. New York and Connecticut have been particularly strenuous in their efforts to short circuit attempts to circumnavigate their state laws.
Last year, Connecticut’s Department of Banking issued cease-and-desist orders to two online lenders owned by the Oklahoma-based Otoe-Missouria tribe for their loans with annual percentage rates as high as 448.76 percent. (The state’s cap is 12 percent). New York state started a similar campaign – though that campaign drew a lawsuit filed by the Otoe-Missouria, along with the Michigan-based Lac Vieux Desert Band of Lake Superior Chippewa Indians in federal court, claiming that New York’s actions were a violation of their constitutionally protected sovereign immunity. The tribes dropped the lawsuit last fall, The Wall Street Journal reported, saying the legal battle “consumed considerable resources.”
However, as of last week, it seems the federal government is looking to take their first bite at the issue – and given the severity of throwing RICO charges at the matter, it’s looking to be a pretty big bite.
The specific case has been brought against 58-year-old Adrian Rubin, a Philadelphia-area resident and payday lending enthusiast.
Rubin is charged with many things – including payday lending without a license, attempts to find “usury friendly states” for his businesses, illegally running a “rent-a-bank scheme,” and working strenuously to hide his involvement in his payday lending companies (since he is a convicted financial criminal – and thus not legally allowed to be involved in this business) by fraudulently stealing his father-in-law’s identity and forging his name on official documents.
However, among the litany of charges Rubin is facing, the one that has perked the most interest is the one that alleges he rented a tribe. Specifically, the case claims that he, in conjunction with a large group of conspirators, paid an unnamed California tribe a monthly commission of $20,000 or 1 percent of gross revenues minus bad debt (whichever was more) and offered said tribe protection from legal expenses.
In return, the tribe was to function as the official owner and operator of the payday lending operation and invoke its sovereign immunity in the event the business was accused of breaking state law.
“In reality, the tribes and tribal affiliates had very little connection to the day-to-day operations of the payday lending operations,” court documents allege. “Typically, the tribes neither provided the money advanced for the payday loans, nor serviced the loans, nor collected on the loans, nor incurred any losses if the borrowers defaulted. Those functions were conducted solely by nontribal payday lenders, such as Co-Conspirator No. 1 and the companies he controlled.”
“The tribes’ sole function was to claim ownership of the payday entities and then assert ‘sovereign immunity’ whenever necessary. … The tribes were paid handsomely by the payday lenders, sometimes as much as tens of thousands of dollars every month, to support this legal fiction,” the filing stated.
Rubin is charged with one count of conspiracy to violate RICO, one count of conspiracy to commit mail fraud and wire fraud, and two counts of mail fraud and aiding and abetting mail fraud. The case – as it relates to the “rent-a-tribe” charges, is essentially that Rubin entered into a conspiracy to evade state lending regulations by using a tribal entity for his corrupt lending practices and hiding behind their immunity from prosecution.
A Loophole For The Loophole
The case in Eastern Pennsylvania is not the first attempt at using the courts to curb the practice of skirting state income caps by lending “virtually” on an Indian reservation, or the first federal move on the practice. In January, two payday lending companies paid $21 million to settle Federal Trade Commission charges that they violated the FTC Act and the Truth in Lending Act by misrepresenting to consumers how much loans would cost them.
But the RICO case and parallel case — also filed in Pennsylvania — does demonstrate a new mindset in going after the practice. Late last year, Pennsylvania’s Attorney General filed charges against short-term lender Think Finance and its president and CEO Ken Rees. The suit claimed the company and CEO violated the state’s racketeering, consumer protection and lending laws.
Specifically, the case hinges on the firm’s agreements with their tribal partners (the Cree, the Otoe-Missouria and Tunica-Biloxi) and amount to a conspiracy to evade state law.
“[Think Finance] as an alternative to making the loans in their own name, structured, participated in, and operated this scheme in which they act as providers of contracted ‘services’ to the bank and the tribes deliberately misrepresenting who was providing the loans,” the state complaint alleges.
The same logic seems to apply in this first ever application of the RICO statute to payday lending through tribal partnerships. The tribe – who remains unnamed in the suit – may have sovereign immunity to make the loans; however, the non-tribal partners have no sovereign immunity and thus can be charged in a criminal conspiracy to avoid usury and racketeering laws.
Both cases bypass the tribal sovereignty issue because both are focused on the rights on the non-tribal business partners instead of the rights of the tribal entities.
The outcomes of both these cases would likely not affect larger lending business officially backed by Native groups such as the Navajo Nation – in which case the native group is directly proffering the loan and protected by sovereign immunity. Navajo Nation, it should be noted, capped charges at an annualized rate of 15 percentage points over a well-known benchmark for corporate lending in 2006, according to The Financial Times.
However, according to Ellen Harnick, a North Carolina-based senior policy counsel at the Center for Responsible Lending — the majority of tribal lenders are actually fronts for payday lenders looking for a loophole to protect them from consumer protection rules.
But, if the Justice Department (and the state of Pennsylvania) get their way – it is a loophole that won’t be open much longer.