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Heather L. Petrovich

Abstracted from: Heather L. Petrovich, Circumventing State Consumer Protection Laws: Tribal Immunity and Internet Payday Lending , 91 North Carolina Law Review 326 (December, 2012) (263 Footnotes)


      Imagine being in an emergency or crisis--you need cash now that you do not have. You are desperate to pay your mortgage and feel as if you have nowhere to turn. Then you see an advertisement, a company offering fast cash advances to help people just like you in times of need! This advertisement, which is typical of payday lenders, praises the various aspects of the product that make it perfect for you: “[O]ur special qualification requirements ensure that you do not need good “Your repayment is the best part. The minimum required payment will be deducted from your bank “Still a little short on payday? No problem! Online customers are automatically renewed every pay Though you are hesitant, thinking this product is too good to be true, you decide to cast aside your reservations and apply. Scenarios similar to the one just described cause many Americans t o become victims of the predatory practices of payday lenders. Deceptive advertisements targeted at desperate consumers frequently occur in the payday lending industry because of the large profits companies generate from these abusive and harmful tactics.

      Although the desire for prosperity is a principle that drives our economy, regulators have recognized that this desire does not come without its risks. Before governments regulated the commercial sector, businesses seeking to increase their profits commonly used corrupt practices against consumers to gain an advantage over their competitors. In response, state and federal agencies emerged to respond to these tactics by regulating businesses through consumer protection laws.

      In addition to protecting the rights of consumers, the federal government has historically protected the seemingly unrelated right of Native American tribes to govern their own affairs. This right has been essential to the relationship between the United States and tribes since the eighteenth century. The federal government characterizes Native American tribes as sovereign entities, “free from state intrusion” on their right to self-governance. As colonists immigrated to America, their encroachment on Indian lands created tension in the relationship between the colonists and tribes. To avoid conflict, the federal government took control of Native American affairs and recognized Indian tribes as “distinct, independent political communities, retaining their original natural rights, as the undisputed possessors of the The federal government continues to regard Native American self-governance as a highly protected interest, which has allowed this relationship to persist over time.

      In most modern contexts, the interests of consumers and tribes typically coexist without conflict. However, these interests have recently collided, causing problems for regulators. In the normal course of governance, state regulators take the primary role in protecting consumers through the enactment of consumer protection laws. It is this important role of state regulators in protecting consumers, however, which has led to the new collision of interests.

      As new consumer threats emerge, state agencies quickly respond with regulation and enforcement to combat those threats. Yet, the emergence of a new threat--tribally owned Internet payday lending companies--has halted state enforcement efforts. Although the federal government has not yet regulated the payday lending industry, consumer advocates have concluded that payday loans are unfair and abusive to consumers, which has led states to be particularly active in regulating the industry. While some states have restricted the terms of these loans to make their effect on consumers less harmful, others have eliminated the payday loan industry entirely.

      Characteristically, payday lenders adapt quickly to new consumer protection efforts by coming up with schemes to get around restrictions. Until recently, states have responded quickly and successfully to nullify these attempts. Nonetheless, the latest method of circumventing state laws through tribally owned payday lenders may prove to be an exception to this norm, leaving states ill-equipped to protect consumers.

      Tribal ownership of a company creates an obstacle for states due to the doctrine of Native American tribal immunity, which limits state control over tribes. Under federal law, immunity prohibits states from bringing enforcement actions against federally recognized Indian tribes or the businesses that they own. Instead, the authority to enforce regulations against the tribes belongs solely to the federal government. Because states exclusively regulate payday lending and may not bring enforcement actions against tribes, tribally owned lenders escape regulation, leaving them free to market harmful products to consumers. Without federal regulation addressing this issue, tribal companies can evade laws applicable to other payday lenders while state regulators are powerless to stop them.

      Tribal lenders who argue against enforcement highlight the importance of tribal economic development to their self-determination. However, in the context of Internet payday lending, this argument has less force than it has in the past. For example, in the case of businesses such as Native American-owned casinos, which are located mostly on tribal land, consumers are aware of the company's tribal ownership and the business activity is geographically contained. Internet tribal payday lenders, by contrast, offer their products online to consumers anywhere in the United States, many of whom are completely unaware of the company's tribal ownership. To make matters worse, many regulators believe that tribal lenders organize under “rent-a-tribe” schemes, where existing nontribal lenders “affiliat[e] with tribes . . . to skirt existing laws and

      As tribal payday lending becomes more prevalent, there is a dire need for federal action to halt the trend's momentum. In 2010, tribal payday lenders made up “[m]ore than 35 of the 300” Internet payday lenders and made “about $420 million in payday The need for regulation of this conduct is imminent--“[s]ome observers predict that the number of tribes with payday-loan operations eventually could climb close to the 400 that now have Additionally, various lenders have shown an interest in copying the tribal lending business model, which will likely result in additional industry growth. In the absence of federal regulation, the number of companies targeting consumers will increase, rendering previous state regulation efforts futile.

      This Comment argues that federal action is necessary to block attempts by payday lenders to bypass consumer protection laws by organizing as tribal entities. Because the federal government does not currently regulate payday lending and tribes are immune from state suit, states are unable to protect their consumers from the practices that they have previously fought to curtail. Due to these obstacles, this Comment proposes possible solutions that can prevent tribal payday lending companies from circumventing state consumer protection laws. Part I provides background information introducing the specific problems that states have encountered in their initial regulation efforts against these companies. Part II describes why tribal payday lending cases are so rare and analyzes this body of case law. Part III analyzes why state regulation is inadequate and the reasoning behind the need for a federal response to this practice. Finally, Part IV examines what courses of action may be taken and which of those proposals are most likely to quickly and effectively address the problem.

. © 2012 Heather L. Petrovich.