Democratic senators, Indian tribes battle over payday lender crackdown bill

Sen. Jeff Merkley is looking to crack down on payday lenders taking their business online.

But his effort could be complicated by a group of Native American lenders who are crying foul over the measure and say it intrudes on tribal sovereignty.

Earlier this week, Merkley (D-Ore.) along with Sens. Tom Udall (D-N.M.) and Democratic Whip Dick Durbin (D-Ill.) unveiled a measure aimed at trimming loopholes that have emerged as payday loans made over the Internet have grown in the last decade.

{mosads}Under the bill, online lenders, including those based offshore or affiliated with tribes, would have to play by the rules established by the state where the borrower resides, not where the business is established. It also would hand more power to the Consumer Financial Protection Bureau (CFPB), allowing it to shut down the payment processing systems for lenders that use online lending to violate state or other lending laws, but otherwise avoid enforcement.

“It is unacceptable that financial predators are using the ‘Wild West’ of the Internet to strip wealth from working families,” said Merkley. “This abusive, predatory lending hits families hard, hurting the parents and the children. We must close the loopholes that have allowed companies to utilize practices already banned in many states.”

Several states have enacted laws placing restrictions on payday lenders offering one-time short-term loans, including caps on the interest rates and fees that can be charged.

But the emergence of the Internet means payday lending is moving away from storefronts and online, where activity can regularly cross state lines. A study released this month by the Pew Charitable Trusts found that of the 12 million Americans that took out a payday loan in 2010, roughly one-quarter did so online. And those numbers could continue to grow.

“This is the growth part of the payday loan industry,” said Jean Anne Fox, director of financial services for the Consumer Federation of America (CFA). “The dollar value of storefront lending has decreased, but the online sector has been growing.”

CFA, along with a host of other community and consumer groups, threw their support behind the measure when it was introduced, calling it a “major improvement” on protecting borrowers.

Just as gambling found a home on Native American reservations protected by sovereignty, so too payday lending has become an attractive way for cash-strapped tribes to boost revenues.

Merkley’s efforts to curb online lending have found opposition in an association of tribal lenders that is warning it could cost tribal governments billions of dollars, kill jobs, and by allowing federal regulators to enforce state laws against tribal lenders, threaten tribal sovereignty. 

“This legislation demonstrates the complete lack of understanding and respect that should be afforded to tribal government entities,” said Barry Brandon, executive director of the Native American Financial Services Association.

The group described the bill almost as a betrayal, noting that Native Americans have “long been staunch supporters of the Democratic Party.”

“For our allies in Congress who have counted on the Native American vote for decades, it is alarming that these members would chose to build a virtual wall that would prohibit tribes from sharing in the 21st Century economy,” said Brandon.

He also took issue with Merkley’s release announcing the bill, which said it would crack down on “rogue online payday lending.” Brandon said the term is “politically insensitive.”

Merkley’s staff insists the bill is not meant to challenge tribal sovereignty, and could offer relief to tribal members struggling under the weight of payday loans.

“In developing this legislation, which addresses problems across the Internet payday world, Sen. Merkley consulted closely with individual tribes as well as organizations representing tribal interests,” said Mike Zamore, his chief of staff.

“Too many people, including far too many tribal members, are trapped in high-interest payday loans that sap what wealth they have.  This bill is narrowly targeted simply to ensure that unscrupulous lenders cannot evade consumer protections established by both states and tribes to protect their people from these predatory practices.”

And Merkley is buoyed by a quartet of Native American community development groups, who have thrown their support behind the measure.

“Risky online payday loans undermine these efforts and the financial health of Native communities,” wrote the groups in a letter to Merkley. “We believe the SAFE Lending Act will begin to help safeguard consumers and law-abiding lenders from abuses rampant today in online consumer lending.”

The bill has been referred to the Senate Banking Committee. But with just one week left before lawmakers break for a month-long August recess, the soonest it is likely to get consideration is when lawmakers return in September.