Maryland challenges online payday lender owned by tribal member

Introduction

Western Sky Financial’s website features a logo with three teepees and a toll-free number for customers to apply for an overnight loan. A notice at the bottom of the page says that the company is “owned wholly by an individual Tribal Member of the Cheyenne River Sioux Tribe.”

Western Sky’s owner, Martin Webb, and other lenders say their relationships with Native American tribes, whose sovereign governments are separate from the states’, protect them from having to comply with state laws that regulate payday lenders.

It’s a trend that has emerged as the latest hurdle in some states’ efforts to tighten regulations for payday lenders whose high interest rates, critics say, trap borrowers in a cycle of debt.

An investigation by the Center for Public Integrity published last month found that affiliating with tribes is a method some Internet payday lenders are using to skirt existing laws and oversight as they make short-term loans to consumers nationwide. While the 2010 financial reform law gives the new Consumer Financial Protection Bureau the power to regulate payday lenders, it remains to be seen whether the agency will crack down on lenders using tribes to claim sovereign immunity.

A new exchange between Maryland regulators and the South Dakota-based Western Sky has opened the latest front in the sticky legal question of who is eligible for tribal immunity.

“I don’t think there’s a lot of grey area in terms of what is or is not permitted,” says Anne Norton, Maryland’s deputy commissioner for financial regulation. “Under our reading of both how tribal immunity is interpreted and how it’s been applied by the Supreme Court, we feel that these are loans that violate Maryland law.”

Norton’s office last month issued a cease and desist order to Western Sky Financial ordering the online company to stop lending in the state. Maryland law requires payday lenders to be licensed by the state and restricts them from charging above a 33 percent annual interest rate on the unpaid balance of a loan.

Western Sky doesn’t hold a Maryland state license and charges significantly over the cap. In one instance cited in the Maryland order, a borrower was paying an effective annual interest rate of 1,825 percent on a $400 loan .

Western Sky has asked Maryland to dismiss the cease and desist order and requested a hearing. Owner Webb has more than a half-dozen other loan businesses, including one called Lakota Cash, and has asserted tribal immunity elsewhere. In a separate action initiated in 2008, the state of West Virginia tried to block Lakota Cash from doing business there. West Virginia said Lakota Cash failed to obtain a state-required license and that consumers complained it charged higher interest rates than the maximum 18 percent allowed by the state.

In an April 2009 letter to West Virginia’s attorney general’s office, Webb’s attorney argued that since Webb is a member of the tribe, he does not have to comply with state regulations. Citing a 2008 case argued under the Indian Commerce Clause of the U.S. Constitution, Webb’s attorney says that tribes are the ones to regulate “nonmembers who enter consensual relationships with the tribe or its members.”

Webb’s attorney did not respond to the Center’s request for comment.

Norton cites other case law. “Recent court decisions have stated that, in determining whether a particular entity is entitled to tribal immunity,” she told the Center, “the proper inquiry is ‘whether the entity acts as an arm of the tribe so that its activities are properly deemed to be those of the tribe,’”

Maryland’s order acknowledges that the Cheyenne River Sioux Tribe is protected by sovereign immunity, but argues that Western Sky is not an arm of the tribe itself and therefore not protected. Further, Maryland argues, Western Sky is incorporated with the South Dakota Secretary of State, so the tribe did not create the business.

Both West Virginia and Maryland are in the process of scheduling hearings in their ongoing cases.