Bloomberg News

Indian Tribes Sue New York State Financial Regulator Lawsky (1)

August 22, 2013

Two American Indian tribes sued New York state’s financial regulatory agency and its head over his crackdown on Internet lending businesses, some of which are tribally owned.

A lawsuit seeking a court order against Benjamin Lawsky, superintendent of the New York Department of Financial Services, was filed yesterday in federal court in Manhattan.

Lawsky on Aug. 6 ordered 35 online lenders, including at least four tribal companies, to stop offering loans in New York. He also sent a letter to 117 banks -- including Citigroup Inc. (C:US), Bank of America Corp. (BAC:US) and JPMorgan Chase & Co. -- requesting their help to block improper lending by cutting off the lenders’ access to the electronic payments system they rely on.

The executive director of the Native American Financial Services Association, Barry Brandon, said that only the U.S. Congress can regulate tribes. The association was formed last year to defend services based in tribal communities.

“We wrote a letter to Lawsky with our concern about his actions, requesting a meeting,” Brandon said yesterday during a telephone press conference. “We received no response from him.”

Payday Lenders

“It is a sad day when payday lenders are suing to make illegal predatory loans, which serve only to trap families in endless cycles of debt,” Matt Anderson, a spokesman for the financial services department, said in an e-mail. “Payday loans are illegal in New York. We have respect for tribal sovereignty, but these are loans sold illegally to New Yorkers outside of tribal boundaries.”

Payday lenders make loans in small amounts for terms as short as two weeks, meant to tide borrowers over until their next paychecks. Online payday loans require borrowers to authorize direct debits from bank accounts to pay back the lender.

The New York regulator’s effort already has effectively blocked tribal businesses’ access to the Automated Clearing House network that handles the credits and debits, according to David Bernick, a lawyer representing the tribes. They want the courts to stop Lawsky from “attacking the banking relationships the tribes absolutely depend on,” Bernick told reporters on the conference call.

No Authority

Filing suit were the Otoe-Missouria Tribe of Indians, based in Red Rock, Oklahoma, and the Lac Vieux Desert Band of Lake Superior Chippewa Indians, based in Watersmeet, Michigan, according to the complaint. There are 564 federally recognized tribal nations in the U.S., the filing states.

“The states have no authority to regulate these tribes in a way that limits their sovereign rights,” said Bernick, a partner at Boies, Schiller & Flexner LLP in New York. He said the tribes have developed the lending businesses in line with their own and federal laws, and customers agree to be subject to tribal requirements. “It’s the virtual equivalent of someone coming on to tribal land.”

Also suing Lawsky are three tribal loan companies and two tribal regulatory agencies, according to the complaint.

Lawsky has called the bank-directed access to the payments system “the foot in the door that online payday lenders need to prey on vulnerable New Yorkers.”

Last week, the Online Lenders Alliance wrote to the organization that manages the payments network, the Electronic Payments Association, or Nacha, asking that it tell the banks to allow access to businesses doing legitimate lending. The trade group said it supports the tribes in this legal dispute.

“The online lending companies they run are legal, licensed and serve thousands of New Yorkers who need short-term credit,” the alliance said in an e-mailed statement.

The case is Otoe-Missouria Tribe of Indians v. New York State Department of Financial Services, 13-5930, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Don Jeffrey in New York at djeffrey1@bloomberg.net; Jesse Hamilton in Washington at jhamilton33@bloomberg.net

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net; Maura Reynolds at mreynolds@bloomberg.net


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