By Pamela A. MacLean The National Law Journal April 7, 2009
State legal challenges to alleged abuses by online payday lenders have mushroomed in recent months, but lenders have countered with unusual tactics, including assertion of sovereign immunity because Indian tribes own them.
In recent years, 15 states have capped interest rates on the short-term lending businesses - from 16 percent in Georgia to 36 percent in Oregon - prompting some firms to move online and offshore, making them harder to track and court orders tougher to enforce, according to regulators.
Colorado, California, Nevada and West Virginia are the latest to file cases against payday lending businesses, only to confront new legal challenges.
Americans turn to the short-term lenders for personal bailouts in times of financial stress. Payday loans are generally small, $300 to $500, and meant to be repaid within two weeks, but often carry whopping interest rates and fees. Although a fee may be $25 or $50 on the short-term loan, on an annualized basis that interest may be 600 percent to 800 percent, according to the Consumer Federation of America. Colorado imbroglio
In Colorado, the state Supreme Court is currently considering whether to step into the debate over the state attorney general's authority to enforce subpoenas against online companies that allege they are owned by sovereign Indian tribes in Oklahoma and Nebraska and thus immune. Some 14 states and consumer groups have joined in asking the court to take up the case. A state appeals court held that Colorado can regulate if the firms are not sufficiently affiliated with the tribes, and it set out a test to determine if immunity applies. The case is Colorado, ex rel. Suthers v. Cash Advance , 2008 WL 1745824.
In a similar California case, Ameriloan v. Superior Ct. of Los Angeles County , 169 Cal.App.4th 81, an appellate court held in January that tribal immunity applies to commercial activity but sent the case back to determine whether the companies were truly acting on behalf of the tribes. A hearing on the case is set for mid-April.
Consumer groups have denounced the lenders' practices as "rent-a-tribe," but Thomas Burke of Jones & Keller in Denver, who represents the lenders in the Colorado appeal, said that, while states may regulate, they cannot do it judicially. "If they want to, that requires federal legislation," he said.
Burke said the state never offered evidence that the company is not controlled by the tribe; "it was simply a naked allegation." He pointed out that, in the context of gambling casinos, tribes hire managers. "No one questions their ability to raise immunity in that context," he said.
Jan Zavisian, a Colorado deputy attorney general of consumer affairs in Denver, said, "We were very surprised two days before a contempt hearing [for failure to appear] they showed up to say they have tribal immunity. I'm sure the industry would rather see federal regulation, but in our view federal regulation is fine as long as states have a role in controlling predatory lending," he said.
In West Virginia, a dozen Internet payday lenders and their collectors were sued on March 26 by state Attorney General Darrell McGraw for alleged abusive practices. But many firms are international, making enforcement difficult.
The state has not authorized payday lenders, but with the Internet and overseas firms, sales in the state are tough to block. "There are so many fringe banking companies that we can't even find a physical address for them," said Norman Googel, assistant attorney general for West Virginia.
Nevada joined forces with the Federal Trade Commission for the first time to garner an injunction on Feb. 24 against seven U.S.-based companies for alleged abusive collection tactics on behalf of international Internet lenders. The case is FTC and Nevada v. Cash Today Ltd. , 08-cv-590BES.
This is the first time the FTC has gone after actual loan and collection tactics, rather than attacking advertising claims, according to Nadine Samter, an FTC regional attorney in Seattle who is working with Nevada on the case. "With international companies, stopping behavior beyond U.S. borders is harder, but there are ways to do it. We can disrupt their banking processing of payments," she said. If Web sites are hosted in the United States, they can be shut, she said.
Eric Berman of Howrey's Washington, D.C., office, an attorney for the lenders in the Nevada case, said the U.S. defendants have ceased allegedly deceptive practices and that all defendants are cooperating with the FTC. Berman said the FTC does regulate international companies whose conduct affects U.S. consumers. He declined to discuss the Nevada litigation.
Pamela A. MacLean is a reporter with The National Law Journal, a Recorder affiliate based in New York.
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