Payday Lending: Goldmine or Fools’ Gold?

First Nations Development Institute

It was Evelyn Beatrice Hall, not Voltaire, who said “I disapprove of what you say, but I will defend to the death your right to say it.” Today, similar statements can be applied to Indian Country when we examine the new partnerships being formed between Native nations and national payday lenders. Many in Indian Country do not agree with this practice, noting that alternative financial institutions and products, like those offered by Community Development Financial Institutions, may be more palatable though agreeably less lucrative. However, organizations working in Indian Country, like First Nations Development Institute, will defend to the death the sovereign rights of Native nations and their choice to enter into these businesses, provided that the few taking this path do not jeopardize the sovereign rights of Native nations as a whole, in their reach for near-term profits.

In a recent issue of Indian Country Today, Ralph Richardson interviewed Montana State Senator Jonathan Windy Boy about the increasing number of Native nations that have formed partnerships with payday lenders (“Montana Senator Sheds Light on Chippewa Cree’s Plain Green Loans”). Senator Windy Boy, and his associates interviewed for the article, attempted to portray partnerships between payday lenders and Native nations as a positive and lucrative development. However, other factors should be considered before the “sovereign-loan model” explodes and becomes the wave of the future in Indian Country, like Windy Boy and his associates suggested it would.The article noted that the large and very lucrative payday lending industry has turned to Indian Country to form partnerships with Native nations because of what was termed the “sovereign immunity loophole.” It was noted that the sovereign immunity “loophole” allows the payday lending industry to set up shop in Native communities and bypass the increasing number of regulations being levied against the industry.

First, it should be clarified that sovereign immunity is not just a “loophole.” Although the payday lending industry sees sovereign immunity as merely a “loophole” to keep exploiting and capitalizing on the financially vulnerable by charging high interests rates on their loan products, Native nation sovereign immunity is a real legal doctrine. It is a doctrine inherent to sovereign Native nations providing limited immunity for the purposes of protecting Native nations in the performance of vital government functions. This very real doctrine is an inherent legal and political right that Native nations have fought hard to maintain, not merely a “loophole” for payday lending exploitation.

Also in the article it was noted that sovereign immunity “shields companies from the U.S. government’s mandated interest rate caps and other payday loan regulations.” The truth is that the federal government has yet to enact sweeping legislation to cap the interest rates of payday lenders. The one exception is a 2007 federal law that caps interest rates for military personnel at 36% as a matter of national security. Thus, Native nations should be aware that case law has yet to determine the scope and applicability of Native nation sovereign immunity on this rate cap. Moreover, if federal legislation does emerge, providing restrictions on payday lending interest rates, Native nations should consider the viability of sovereign immunity as a defense against this potential federal legislation.

The article was correct in noting that there have been increasing regulations levied against the payday lending industry, claiming among other things, that payday lenders charge excessive interest rates, sometimes higher than 300%, prey on the poor and often minority populations. However, the regulations that have emerged have largely come from state governments (and in some rare instances, county governments). Currently case law within some states and district courts have rightfully upheld Native nation sovereign immunity in the face of state laws, but it should be noted these cases may be only the beginning of litigation against Native nations and the larger payday lending industry. We may in fact experience increasing legal challenges against Native nation sovereign immunity as a result of these partnerships. Thus, the doctrine of Native nation sovereign immunity will be looked upon with increasing scrutiny, in costly legal battles, in courts that have not historically been the best friends of Indians.

Much of the language used by Senator Windy Boy and his colleagues indicated that the partnership between the payday lending industry and Native nations provides a vital service for many Americans. In particular, the suggestion was that new payday lending partnerships should be praised as they provide access and financial resources for “underbanked” citizens across America. Moreover, the suggestion was that these partnerships should be replicated in other Native communities as they are a potential goldmine for Native nation development.

But what Senator Windy Boy forgot to mention is that states, consumer advocacy groups and other non-profit organizations across the U.S., including many Native community development financial institutions (CDFIs) operating in Indian Country, have openly opposed payday lending and Native nation/payday lending partnerships.

In large part, Native opposition has stemmed from research that has found high numbers of payday lending users in Indian Country and tribal leaders identifying this as a significant problem in their communities. A 2008 research report by First Nations Development Institute, titled Borrowing Trouble: Predatory Lending in Native Communities, documented the high numbers of payday lending organizations located near Indian reservations and advertising to Native community members. And research shows that the average payday lender gets trapped in a cycle of debt and takes out eight or more loans a year – much more than an occasional “hand up” to help them get by. Many Native leaders recognize payday lending for what it is – a flawed product, the Ford Pinto of the financial services industry. Many Native leaders have noted that predatory lending practices continue in the vein of historical asset theft from Native peoples and communities, but now the new payday lending predators are reaching directly into Natives’ pockets for their paychecks.

Native leaders and citizens remember the history of large outside businesses looking to Native nations as “goldmines” for exploitation, especially Native lands and natural resources. Now outside businesses are beating on the doors of Native nations to hide behind Native nation sovereignty, a right that Native nations have fought hard to maintain in the face of centuries of federal policies that have looked to reorganize, remove and terminate. This history should serve as a reminder that while outside businesses may promise gold, all that glistens is not gold.

At First Nations Development Institute we understand that Native nations face difficult challenges. In the face of budget cuts and constant challenges to sovereignty, Native nations must persevere and pursue responsible economic and political development strategies for the betterment of Native citizens. Moreover, as sovereign nations, Native nations must pursue development strategies that best fit their specific needs and desires.

However, in order to understand payday lending and the new and emerging partnerships with Native nations, Native leaders must fully consider how these partnerships may impact tribal sovereignty for all Native nations and how these partnerships may impact Native citizens and other financially vulnerable Americans. Thus, Native leaders and citizens need to pull back the layers of rhetoric circulated by the payday lending industry and their allies, claiming the virtues of Native nation/payday lending partnerships, and ask some hard questions including: Why is the payday lending industry suddenly beating on the front doors of Native nations asking for partnerships? What are the long-term political, economic and legal implications of these partnerships for Native sovereignty? Is there potential legal, political and economic blowback that can result from these partnerships?

There is little doubt that the payday lending industry will not be fully forthcoming in trying to answer these questions. Thus, Native leaders should fully investigate these questions as decisions and partnerships made today can definitely impact the future wellbeing and sovereign rights of Native nations and citizens.

This article was written by Raymond Foxworth (Navajo), Program and Research Officer at First Nations Development Institute, Michael E. Roberts (Tlingit), President of First Nations Development Institute and Chairman of the Board of Directors for First Nations Oweesta Corporation and Sarah Dewees, Senior Director of Research, Policy, and Asset-Building Programs at First Nations Development Institute.