Does Tribal Lending Have A Future?

Scott Tucker’s pre-sentencing “apology” will not likely be remembered as one of history’s greatest all-time allocutions of contrition.

The Kansas businessman – facing a 2017 conviction for violating federal truth in lending and racketeering laws in connection with his online lending business – attempted to apologize for the $3.5 billion he reportedly made while running that business.

“Although I saw myself as being an entrepreneur, a jobs provider and a contributor to the American economy, I’ve learned that others view me through a different lens. I am very sorry that our leaders castigate me as a villain, or some type of predator,” Tucker wrote to U.S. District Judge Kevin Castel in Manhattan. Tucker also noted he was “remorseful,” though he clarified that his remorse was directed to “the misperception that I do not recognize my responsibility to live as a good and fair businessman, employer and American citizen.”

It may not be remembered as one of history’s best apologies, but it does have a shot at making the terrible ideas hall of fame, since writing his apology letter had the opposite of the desired effect. According to Reuters, it served to convince the judge that Tucker had not really accepted that his actions were against the law.

“The notion that Mr. Tucker is just an honest businessman doesn’t fly with me,” Judge Castel said.

Tucker was sentenced to 16 years and 8 months in prison in connection with his October conviction. Judge Castel also sentenced Timothy Muir – the lawyer who worked with Tucker and was convicted of the same charges in October – to seven years in prison.

But more than a tutorial in how not to apologize pre-sentencing, some say that Tucker’s conviction and long sentence may be the beginning of the end of tribal short-term lending in the United States.

Regulators spent most of 2017 cracking down on the practice. Opponents of tribal lending applaud this, noting that Tucker’s story is common and symptomatic of the trouble with the industry as a whole.

But tribal lending has its defenders as well, who note that the funds it generates are essential to the tribes that offer it. They also argue that the federal and state governments have no right of regulation here, because tribal sovereignty is protected by treaty.

Tribal Lending

Some short-term lenders – particularly those feeling the squeeze from state regulations around such loans (i.e. payday loans, title loans, etc.) – have sought to affiliate or partner with Native American tribes. Why? Those tribes have sovereign immunity on their own lands, and are thus not subject to a variety of state and federal laws. Sovereign immunity on tribal lands is why Native American tribes so often operate casinos, for example.

The same rule arguably allows these tribes to offer loans that do not conform to state lending laws for things like interest rate caps or term length restrictions – even if they are making loans to borrowers outside of tribal territory. Tribal lenders have even fought the CFPB’s demand for records at various times, on the argument that sovereign immunity also frees them from supervision by the Bureau.

Tucker ran afoul of the law by pushing interest rates to a level considered extreme – even by the standards of short-term lending, where three-digit APRs are considered the norm. Tucker’s business charged an average interest rate of 700 percent on loans, as well as some that scraped the 1400 percent mark at times. According to a Department of Justice’s case, a consumer who borrowed $500 from Tucker and who paid that loan back on time could, on average, expect to pay over $1,900 total for the loan.

The DOJ further successfully argued that Tucker – a former race-car driver and longtime player in the short-term lending industry – had entered into a “sham partnership” with a Native American tribe with the sole and express intention of avoiding regulations and exploiting cash-strapped customers.

“Tucker and Muir sought to get away with their crimes by claiming that this $3.5 billion business was actually owned and operated by Native American tribes, but that was a lie,” noted acting Manhattan U.S. attorney Joon H. Kim.  “The jury saw through Tucker’s and Muir’s lies and saw their business for what it was – an illegal and predatory scheme to take callous advantage of vulnerable workers living from paycheck to paycheck.”

And while the consensus is that Tucker’s and Muir’s business was extreme in its practices, the actions it undertook to flout consumer protections laws are more or less par for the course in the tribal lending industry.

“Genuine tribal businesses are entitled to ‘tribal immunity,’ meaning they can’t be sued. If a payday lender can shield itself with tribal immunity, it can keep making loans with illegally-high interest rates without being held accountable for breaking state usury laws,” noted consumer advocate Leslie Bailey in a blog post.

The Complicated Path Forward

While tribal lending has attracted a lot of attention in recent months – which may be sufficient to turn lenders away from it, so as not to end up in the cross-hairs of regulators – the practice may have life in it yet.

Both Tucker and Muir have vowed to appeal – and it remains unclear what constitutes a genuine relationship with a tribe for lending purposes, as opposed to a “sham” relationship.

Skip Durocher, an attorney for Miami Nation Enterprises – the entity that claims an affiliation with the Miami tribe (and one of Scott Tucker’s business partners in short-term lending operations) – said he will continue to argue that his client is a tribal entity and that its partnership with Tucker’s business was legitimately protected against state and federal interference.

“This is a fight about tribal sovereignty,” Durocher said. “We’re confident that when the facts are laid out, we’ll prevail.”

Moreover, tribal authorities like Sherry Treppa, chairperson of the Habematolel Pomo tribe, says that the funds generated by lending are important to the lives and livelihoods of the tribes.

Treppa says the lending business “has been transformative,” providing funds for tribal government services, stipends for seniors and scholarships for students.

“Without tribal lending, these programs would be impossible,” she said.

For now, experts are confident that the Tucker conviction will likely push other lenders away from tribal affiliation, but that a successful appeal could easily change that.

But an appeal would have to be successful – and there are a lot of murky issues to navigate between this issue and that event.