Robert Cordray, Director of the Consumer Financial Protection Bureau (“CFPB”) has stated that his agency intends to regulate payday lending, and has indicated that this includes tribal payday lenders. However, the CFPB has limited ability to regulate tribal payday lenders due to the sovereign status of Indian tribes. The states are even less able to regulate tribal activities.
Payday lending is the business of providing short-term, high interest loans that are typically due within two weeks, or on the borrower’s next payday. However, many borrowers let the loans roll over, only paying the interest and penalties due, and generating “churn”, which is how lenders make much of their money. The CFPB is concerned that many borrowers can end up paying up to 300% – 400% interest on their original loans and is looking for ways to regulate this industry.
Indian tribes, particularly those that do not have casinos, have started lucrative online payday lending operations by partnering with existing online payday lenders who pay the tribes fees for the legal immunity the tribes can bestow upon these lenders. Mr. Cordray stated to a group of state attorneys general in March 2012: “If, in fact, that entity is not truly a tribal entity, but it’s just a sham arrangement, then the courts would have an opportunity to look through that and see it for what it is.” However, the Dodd-Frank Act may not apply to tribes because Congress did not include tribes within the definition of “covered persons”, and the CFPB is not permitted to regulate interest rates. Therefore, the CFPB may have to deal with the issue by regulating borrowers in limiting the number of consecutive loans a borrower can take or by forcing borrowers to take a certain amount of time between loans.
In any event, it is clear that online payday lending is a growing industry, that tribes see it as a source of significant revenue, and that the CFPB is concerned about the adverse effects of payday lending on consumers. The CFPB is looking at ways to regulate this industry, even the tribal entities. Whether it can effectively accomplish that remains to be seen.