Indian Tribes Expand Into Payday Loans

American Indian tribes are tapping into a new revenue stream – payday loans, frustrating state efforts to curtail and even eradicate an industry widely seen as predatory and usurious, The Wall Street Journal reported today.

Because they are sovereign nations under their treaties with the U.S., Indian tribes are immune to state interest-rate caps and regulations imposed on the payday loan industry. They can even operate in the 12 states that have banned payday lenders outright.

It's not, of course, the Indian tribes themselves who are opening storefront and Internet loan operations. Instead, existing lenders “move” their headquarters to an Indian reservation,usually in name only,and share their revenue with tribal leaders.

The Journal reported that at least 35 of the 300 companies making payday loans via the Internet are owned by American Indian tribes.

Some observers think the number of tribes in the payday loan business will approach the 400 that now own casinos.

States are largely powerless to interfere. Colorado has sued lenders owned by the Miami Nation of Oklahoma and the Santee Sioux Nation in South Dakota but the Colorado Supreme Court ruled last year that the lenders were protected by their association with the sovereign tribes.

Congress has regulator power over Indian tribes but the likelihood of meaningful legislation in the near future is slim.

Last year's creation of theConsumer Financial Protection Bureau (CFPB) had been viewed as a deathblow against the industry and Wall Street analysts expected the agency would quickly regulate payday lenders out of business.

But that was while the Indian Connection was not yet on lenders' radar. Lawmakers leading the charge against payday loans may find that they have inadvertently followed General Custer's strategy.