This article was supervised by MinnPost journalist Sharon Schmickle, produced in partnership with students at the University of Minnesota School of Journalism and Mass Communication, and is one in a series of occasional articles funded by a grant from the Northwest Area Foundation.
Catch a sports broadcast in Minnesota, and you’re likely to see fast-cash commercials with a legal twist: You can get hundreds – even, thousands – of dollars in your checking account tomorrow. No collateral needed. And don’t worry about state-imposed loan limits because this deal would come from a Native American-owned business.
Easy money? Not necessarily. Borrowers who bite on these ads can find themselves in murky legal waters where regulators are powerless to help them settle disputes and courts can’t agree on the reach of tribal sovereignty.
Thousands of borrowers have complained to government authorities nationwide about problems with tribal-affiliated loans. They’ve alleged that their bank accounts were tapped for fees as high as three times the original loan amount, their wages were improperly garnished by distant tribal courts and their objections were met by threats of arrests and lawsuits.
In Minnesota, Attorney General Lori Swanson has referred some such complaints to the national Consumer Financial Protection Bureau, said her spokesman Benjamin Wogsland.
Many tribal lending businesses are legitimate, as are the tribes’ sovereign rights to operate them on their own terms. Indeed, one Minnesota tribe, the Mille Lacs Band of Ojibwe, owns a respected chain of federally chartered banks.
But in the bold world of online lending, some non-Indian players are using tribal sovereign immunity as a front – so-called “rent-a-tribe” schemes – in order to dodge state limits on loan amounts, interest rates and collection tactics, federal authorities allege.
“These payday lenders are like amoebas, they keep changing forms,” Wogsland said. “The little guy is getting pounded by these loans.”
Minnesota crackdown
Swanson has moved recently to crack down on non-Indian online lenders who were operating illegally in Minnesota. On May 31, Ramsey County District Judge Margaret Marrinan ordered Delaware-based Integrity Advance LLC to pay $7 million in damages to the state as well as $705,308 in restitution to Minnesota borrowers.
The company also was barred from collecting interest and fees on loans granted to Minnesotans unless it becomes properly licensed in the state. Integrity initially denied that it was lending to Minnesotans, but Swanson’s office compiled evidence indicating it had granted at least 1,269 payday loans in the state. It had charged Minnesota borrowers interest rates up to 1,369 percent, far in excess of caps set in state law, the judge said.
The case was the eighth recent court victory Swanson’s office has scored against online lenders. Is she now setting her sights on the lenders who claim tribal immunity to get around state law? Wogsland said he could neither confirm nor deny any investigation.
Wogsland did say, though, that the office is “aware” of problems with online lenders “claiming they are somehow immune from the law because of some kind of sovereignty.” The concern, he said, arises when the lending operations “are not actually run by a tribal unit but it’s maybe just a rent-a-tribe scenario or an individual member claiming that they’ve got sovereignty and that the laws don’t apply to them.”
The new casino
It is easy to see why online lending and other forms of e-commerce appeal to tribes, especially those on remote reservations where casino returns have been disappointing, and ultra-high unemployment persists.
Think of the online loan business as the new casino, a fresh chance to boost the lives of impoverished people. In fact, the legal reasoning is similar to the argument American Indians deployed more than 20 years ago to launch a new era of casino gambling. It holds that tribal businesses have sovereign rights to set their own rules.
Is it the same, though, when the business offers loans to borrowers who are not on tribal land? Going to a reservation to play slot machines is one thing. Is it comparable for someone to sit in an office on an Indian reservation and negotiate a loan via Internet and/or phone with a borrower who is in, say, Mankato or Anoka or Hibbing?
Several states have said no. And the U.S. Federal Trade Commission has moved in federal court to reign in some tribal-affiliated lenders.
Sovereign reach?
Authorities allege that one lender in particular, South Dakota-based Western Sky Financial LLC, has preyed on debt-burdened consumers -- charging excessive rates, operating without state licenses, and forcing borrowers to fight garnishments before a tribal court that lacked jurisdiction over their cases.
Western Sky, which has advertised in Minnesota, did not respond to MinnPost’s requests for comment. On its website, the company lists 17 states where its loans are not available. Minnesota is not listed. In other words, a Minnesota borrower might assume the company has the right to lend in the state.
Is that true? Minnesota law requires that lenders be licensed, and Western Sky is not among licensees listed on the state Commerce Department "license lookup" website.
But that’s where the sovereignty argument begins. Western Sky’s website emphasizes that it “is a Native American business operating within the exterior boundaries of the Cheyenne River Sioux Reservation, a sovereign nation located within the United States of America.”
Further, it says: “All loans will be subject solely to the exclusive laws and jurisdiction of the Cheyenne River Sioux Tribe, Cheyenne River Indian Reservation. All borrowers must consent to be bound to the jurisdiction of the Cheyenne River Sioux Tribal Court, and further agree that no other state or federal law or regulation shall apply to this Loan Agreement, its enforcement or interpretation.”
Battles in other states
While Minnesota regulators won’t say whether they are investigating Western Sky, other states have moved to block the company.
In April, Oregon’s Department of Consumer and Business Services issued a cease-and-desist order against Western Sky and fined the company $17,500 “for making loans in Oregon without a proper license and for charging interest rates in violation of Oregon law.” The department’s statement said that Western Sky had “promoted its loans through an aggressive TV and radio advertising campaign in many states, including Oregon,” and had charged annualized interest rates ranging between 89 percent and 342 percent.
A screen shot of the Western Sky Financial website.
Colorado’s Attorney General sued Western Sky and its owner, Martin A. Webb, in state District Court in 2011 alleging that the unlicensed lender had illegally granted some 200 loans in Colorado.
A Colorado District Court judge was not persuaded by Western Sky’s argument that Indian-owned businesses operating on a reservation are not subject to state rules. In a summary judgment finalized this May, he sided with the state, noting that borrowers applied for their loans and received them in Colorado, not the South Dakota reservation. And they repaid the loans and the finance charges from Colorado, typically by Western Sky withdrawing funds electronically from their local bank accounts.
The Colorado court also didn’t buy Western Sky’s requirement that the borrowers submit to the jurisdiction of the Cheyenne River Sioux Tribal Court.
Nor does the Federal Trade Commission. The agency has charged in U.S. District Court in South Dakota that Western Sky and affiliated loan companies “sought to unfairly and deceptively manipulate the legal system and force debt-burdened consumers throughout the country to travel to South Dakota and appear before a tribal court that did not have jurisdiction over their cases.” The FTC said that Webb also does business under several different names, including Payday Financial LLC, Lakota Cash and Great Sky Finance.
A borrower eager for the cash may rush past the fine print saying that any claims will be settled in tribal court. Big mistake, according to the FTC.
“When customers fall behind in their payments, Payday Financial, LLC improperly files suits against them in the Cheyenne River Sioux Tribal Court, attempting to obtain a tribal court order to garnish their wages,” the FTC said in summarizing its case. “The tribal court does not have jurisdiction over claims against people who do not belong to the Cheyenne River Sioux Tribe and who do not reside on the reservation or elsewhere in South Dakota.”
At least 15 other states have moved to bar Western Sky. And the Better Business Bureau gives the company an F rating.
Although Western Sky and its affiliates did not respond to MinnPost’s e-mails and phone messages, Webb did talk with USA Today for an article published last November.
"I think we're serving a group of people that are underserved by conventional banking," Webb told USA Today.
Webb said that his operation is a major employer on the Cheyenne River reservation.
Further, Webb hasn’t disputed claims that his companies’ interest rates can exceed 300 percent. He told USA Today that the rates are high because many borrowers don't repay their loans. In fact, one Western Sky television ad features a spokeswoman saying, "Yes, the money's expensive, but there's no collateral required, and you can keep the cost down by paying it back as fast as you can."
"We're a very open, honest company," Webb said.
Rent-a-tribe
There is a key difference between Webb and some other tribe-affiliated lenders. While Webb is an enrolled Cheyenne River member, that tribe is not a partner in his businesses.
Far more complicated for regulators and courts are cases in which tribes themselves launch online lending operations or forge partnerships with non-Indian lenders in so-called rent-a-tribe arrangements.
In 2010, the Better Business Bureau warned cash-strapped families to beware of online lenders claiming they were not beholden to state or federal laws. After receiving hundreds of complaints, the BBB said that lenders, when confronted, typically claimed legal immunity – “often claiming that they are based in another country or on Native American reservations and are sovereign nations.”
The BBB also said that the West Virginia Attorney General had “evidence to prove the lenders who claimed tribal sovereignty were not actually part of the tribe but were merely ‘renting’ it for the purposes of claiming shelter from state and federal laws.”
A high-profile case surfaced last year when the FTC asked a federal court to stop a network of companies led by race car driver Scott Tucker of Kansas who has claimed affiliation with the Modoc and Miami tribes of Oklahoma and the Santee Sioux Nation of Nebraska. More than 7,500 borrowers nationwide had complained to authorities about the operation, the FTC said.
“Like other payday lenders in recent years, this operation has claimed in state legal proceedings that it is affiliated with Native American tribes, and therefore immune from legal action,” the FTC said in a statement. However, it added, the tribal affiliation does not “exempt them from complying with federal law.”
The FTC alleges that the operation gained access to borrowers’ bank accounts, claiming it would take out the sum borrowed plus a one-time finance fee, but instead “made multiple withdrawals . . . and assessed a new finance fee each time.” When borrowers balked, it alleged, they were threatened with arrest, lawsuits and imprisonment. In a typical example, one consumer was charged $1,925 to repay a $500 loan, the FTC said.
A screen shot of the Payday Financial, LLC website.
Rather than leaving the profits with the tribes, Tucker and his brother, Blaine Tucker, allegedly transferred more than $40 million dollars collected from borrowers to another company Scott Tucker controls for “sponsorship” fees that benefit Tucker’s automobile racing, the FTC said.
Meanwhile, Larry Robinson, a borrower in Missouri, led a class-action lawsuit against Tucker in U.S. District Court in Kansas City. The complaint alleges that the tribes’ deal with Tucker called for each tribe to be paid a few million dollars upfront followed by 1 percent of gross revenues as “rent” for the tribe’s legal immunity.
Colorado authorities have tried for years to block such operations, but the Colorado Supreme Court ruled that the loan businesses were acting as arms of the tribes and therefore were protected by tribal immunity even while they did business off the reservations.
Watching from Minnesota
Minnesota tribes are watching while the online loan industry takes shape in other states.
High-profile legal skirmishes aside, the Native American Financial Services Association argues that there is a compelling reason to justify tribal online lending when it is done responsibly: It can benefit remote reservations where casinos have attracted few outsiders.
“Our members in Montana, Oklahoma, North Dakota and other rural areas have difficulty generating revenue and jobs on the reservation due to their distance from population centers,” Barry Brandon, the Association’s executive director, said in an email response to MinnPost. “Tourism is also not an option for some of our member tribes, who have begun innovating through e-commerce. These tribes are generating jobs and revenue . . . by providing a needed resource to underserved consumers.”
The association’s members must follow a set of “Best Practices that ensure the tribes’ constitutionally guaranteed rights are protected and that consumers receive high quality financial services,” he said.
Spokespersons for several Minnesota tribes said they are not presently in the lending business.
John McCarthy, executive director of the Minnesota Indian Gaming Association, said he meets regularly with representatives of the Minnesota-based tribes and he has heard of no plans to launch online loan businesses in the state anytime soon.
“You may see more of that as time rolls forward, depending on how the rules and regulations take shape,” he said.
Jeff Hargarten contributed to this story.