Internet Payday Lending: A New Era

Internet payday lending has increased significantly over the last decade and the industry continues to evolve to skirt state regulations. Payday lending is a predominately state regulated field and the federal government has not widely addressed the issue. However, a new development in internet lending poses significant risks to consumers.  It has been referred to as “rent-a-tribe” internet payday lending. The tribe in “rent-a-tribe” refers to Native American tribes officially recognized as independent sovereignties by the federal government. The new trend entails payday lenders partnering with tribal sovereignties in order to avoid state regulations. Payday lenders incorporate an already existing online payday lending company under tribal laws. In return for allowing the corporation to incorporate under tribal laws, the tribes receive a financial benefit. Some reports have found that this financial benefit can be as little as 1-2% of the company’s profits. The “rent-a-tribe” business model is becoming more popular as internet payday lenders realize the benefits of the tribal partnership.


Why would an already established company want to reincorporate under the laws of a Native American tribe? Native American tribes operate as independent sovereignties that are protected against being sued in court. This is called tribal immunity. The U.S. Supreme Court in Kiowa Tribe v. Manufacturing Technologies, Inc. held that tribal corporations operating outside the boundaries of the reservation can claim sovereign immunity. Therefore, internet payday lending companies affiliated with Native American tribes also enjoy tribal immunity.


What is so special about tribal immunity? Tribal sovereigns generally are immune from lawsuit. Because a Native American tribe retains the right of self-governance over its land, tribal immunity is an inherent power that prohibits state and private lawsuits in court against the tribe. Sovereign immunity also protects the federal and state governments from suit except in very limited circumstances. Therefore, tribal immunity means that state governments generally cannot enforce their payday lending regulations against tribally affiliated internet payday lenders by suing them in court. State governments generally do not have jurisdiction over tribal corporations, even though these payday lending companies operate within the state and in violation of state regulations. A tribal court would have jurisdiction over the tribally affiliated internet payday lender. However, it is unlikely that a tribal court would restrict the partnership with internet payday lenders because it is a source of revenue for the tribe. 


Why would a Native American tribe allow internet payday lenders to incorporate under tribal law? Native American tribes often face economic constraints that require them to explore ways to increase tribal economic development. Similar to the tribal gambling industry, internet payday lending is another way tribes can generate funds. However, unlike casino revenue where tribes keep at least 60% of the profits, only 1-2% of payday loan profits or a meager monthly stipend actually go to the tribes. Tribally affiliated internet payday lenders made approximately $420 million in 2011 from internet payday lending. Under the “rent-a-tribe” business model, non-tribal outsiders make huge profits leaving minimal economic benefits for the tribe.


There generally are only two ways that states may challenge tribal immunity. First, the Native American tribe may waive its tribal immunity permitting aggrieved parties to sue them in court. The other option is for the federal government to implement legislation that limits tribal immunity. It is unlikely and uncommon for Native American tribes to waive their tribal immunity, and the federal government has yet to restrict tribal immunity in a way that requires internet payday lenders to comply with state regulations.


Unless and until the federal government addresses the problem of internet payday lenders affiliating with Native American tribes as a way to avoid state regulations, internet payday lenders may continue to operate with disregard of state regulations that are designed to protect consumers.


Internet payday lending is dangerous because consumers may not know who they are in business with. Internet payday lenders are often faceless and unknown entities that make it difficult to understand who is actually servicing the loan. In the case of “rent-a-tribe” companies, consumers often cannot pursue established legal remedies that are designed to protect consumers. Borrowers can prevent this by visiting an actual brick and mortar payday loan building within their state. These establishments have a known face behind the loan and must follow state regulations. Further, because these payday loan servicing centers must comply with state regulations, consumers maintain all their consumer rights established under law.

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