By Conor L. McSweeney
The Consumer Financial Protection Bureau (CFPB) is a federal agency still in its infancy, only created in the aftermath of the Great Recession pursuant to the landmark Dodd-Frank Act. The CFPB has attempted to continue on as business as usual following President Trump’s election victory, despite the greater focus on decreasing regulation in the financial industry being at the forefront of the President’s plans for all federal agencies. With the original Director of the CFPB due to step down, and a successor handpicked by President Trump likely to minimize the regulatory might of the CFPB, the agency finds itself at a crossroads. One of the areas of financial regulation the CFPB has been especially focused on is tribal lending, where Native American tribes form legal entities that offer loans online at predatory rates while also claiming sovereign immunity from most lawsuits and justice on behalf of the consumer.
What is Tribal Lending?
The emergence of Internet commerce has enabled a cottage industry to take shape for Native American tribes lacking the resources to develop casinos or proximity to major metropolitan centers in the form of consumer lending. The Native American tribe forms a lending entity under the shield of its tribal sovereignty, referred to as a tribal lending entity, or TLE. The TLE makes loans over the Internet across state lines to consumers, usually on terms that are illegal by a given consumer’s state usury laws. The most common type of consumer lending undertaken by the TLE is what is considered “payday” loans, which provide a short-term loan to a consumer to pay bills and other expenses prior to receipt of their next paycheck. Payday loans are traditionally small amounts, between $100 and $1,000, and usually incur high interest rates with Annual Percentage Rate (APR) as high as 400 percent in states where payday loans are legal. (Hilary B. Miller, The Future of Tribal Lending Under the Consumer Financial Protection Bureau, American Bar Association, archived at: https://www.americanbar.org/publications/blt/2013/03/04_miller.html).
The TLE is deemed an “arm” of the tribe and benefits from the tribe’s sovereign immunity. As a result, the TLE may be sued only under very limited circumstances, such as when the tribe has voluntarily waived its immunity, or Congress has authorized jurisdiction over a tribal entity. Most of the TLE’s do not have the financial resources to operate a widespread national lending operation on their own, and therefore they commonly partner with non-tribal third party financiers. TLE’s have been known to interest rates on payday loans between 520 and 950 APR, which would be illegal in most states. Therefore, the net gain and of the excessive interest rates offered by a TLE passes through to the third party financiers, but most state authorities are unable to pursue recourse against the TLE due to the shield of sovereign immunity and their third party financiers are often kept secret by their tribal partners.
Enforcement by Consumer Financial Protection Bureau (CFPB)
Article 10 of the Dodd-Frank Act created the Consumer Financial Protection Bureau that granted the CFPB with regulatory oversight and enforcement power over payday lenders. When participating in consumer lending activities, the Native American tribes were not expressly exempted from oversight by the CFPB and the federal agency has pointed to this provision when pursuing enforcement against various TLE’s. In particular CFPB has pursued TLE’s for charging interest rates as high as 950 percent in violation of state and federal consumer protection laws. The roundabout way that the CFPB enforces the law against TLE’s is for collecting debts that were not legally owed to them.
One such enforcement action is against the Golden Valley Lending Inc., Silver Cloud Financial Inc., Mountain Summit Financial Inc., and Majestic Lake Financial Inc., which are owned and incorporated by the Habematolel Pomo of Upper Lake Indian Tribe, located in Upper Lake, California. The CFPB initiated a lawsuit against the Upper Lake Indian Tribe charged illegal interest rates and when they sought to collect fees from consumers who paid the illegal interest rates, the TLE broke federal consumer protection law. In addition, the lawsuit takes specific aim at the TLE’s third party partners that conduct operations are conducted from call centers thousands of miles away. The TLE does not have a brick and mortar presence on tribal land as all loans are originated from call centers and online, while the majority of employees were not actual members of the Native American tribe. The CFPB asserts that the loans should therefore be void or uncollectible because they exceed state usury limits. As of this writing, the lawsuit is still unresolved and that may lead to an opening for the Upper Lake Indian Tribe to get off with a lesser punishment with the Trump administration’s transition.
State of the CFPB
Since its inception, pro-Wall Street and predominantly Republican politicians in Washington D.C. have sought to minimize the CFPB’s power. With the resignation of CFPB’s first director, Richard Cordray, the future effectiveness of the CFPB appears to hang in the balance. President Trump almost immediately intimated his desired replacement with naming Mick Mulvaney, the current budget director, as acting director of the agency. Under the Federal Vacancies Reform Act of 1998, President Trump can install a Senate-approved appointee like Mulvaney as acting director of the CFPB until such time as another appointee for permanent director is approved by the Senate. However, under the Dodd-Frank Act, a provision allows the deputy director of the agency to serve as acting director in the absence or unavailability of the director. As he was exiting the CFPB, Richard Cordray nominated Leandra English to the role of deputy director and subsequently resigned. On Sunday, November 26, 2017, Ms. English filed a temporary restraining order asserting her status as the rightful acting director, a decision that will hinge on the interpretation of “unavailability” in the Dodd-Frank Act. One important detail in the court’s deliberation will be the original legislation from the House of Representatives explicitly applied the Federal Vacancies Reform Act to openings for the director of the CFPB, but the final piece of legislation signed by President Obama did not include the provision, which would imply the legislator’s intended for the unavailability to include a resignation.
It is unclear how the fight between the Trump administration and the CFPB will ultimately shake out, but the effects on the tribal lending industry could not be greater. Deregulating and ultimately defanging the CFPB may result in the purveyance of more TLE’s making predatory loans to the working poor who already are struggling to pay their bills. The CFPB serves as a critical consumer watchdog and enforcement mechanism that could be left to gather dust for the next three years under the Trump administration. Existing cases brought by the CFPB, like those against the Upper Lake Indian Tribe, may lose some of the focus and attention of the CFPB leadership and languish. Republican administrators typically take a hands-off approach to exercise of free market financial activity and with their sights long-set on the CFPB, including an off-hand remark by Mick Mulvaney that the CFPB was a “sad, sick joke”, predatory loans in the payday lending market may be one of those industries allowed to flourish.
Student Bio: Conor is a Chief Note Editor on the Journal of High Technology Law. He is a fourth-year evening student at Suffolk University Law School and possesses a B.A. in Political Science from Siena College with a minor in English.
Disclaimer: The views expressed in this blog are the views of the author alone and do not represent the views of JHTL or Suffolk University Law School.