Law Article: States and consumers take aim at Indian lenders

The tribal payday lending business finds itself facing a flurry of class action lawsuits and state crackdowns painting the lenders as loan sharks preying upon vulnerable consumers with usurious rates and fees. The tribal payday lenders respond that they are immune from state regulation, service a legitimate market need, and generate much needed jobs and income for Indian tribes.

Tribal payday lenders purportedly originate loans over the Internet from within Indian Country, claiming that tribal sovereignty and immunity from suit allow them to circumvent state consumer protection laws capping interest rates. The loan agreements generally specify tribal jurisdiction and individual arbitration of disputes and defaults, preventing borrowers from escaping the debts in state courts. Fees and interest rates on these loans can reportedly reach an effective APR of 500%.

A federal class action suit filed against Western Sky Financial, a South Dakota lender owned by a Cheyenne River Sioux member, and other payday lenders demonstrates the profitability of the business and the borrowers' difficulty escaping the cycle of debt. North Carolina resident Thomas Brown, a disabled veteran and named plaintiff in the litigation, initially borrowed $2,600 from Western Sky. Western Sky immediately withheld $75 from the loan as an origination fee. The repayment terms required Brown to make 48 monthly payments at an effective interest rate of 273% resulting in total payments of $14,102.87 – more than five times the $2,525 Brown received. Western Sky accessed Brown's bank account, into which his military disability income is directly deposited, and directly debited the loan payments.