Law Article: Clash of competing sovereigns in tribal lending case

In a clash of competing sovereigns’ interests, the Second Circuit recently upheld, for now, the authority of the New York Department of Financial Services (DFS) to regulate online payday loans made by Indian tribal lenders to New York borrowers. The Second Circuit’s decision in Otoe-Missouria Tribe of Indians v. New York State Dep’t of Financial Services affirmed the lower court’s denial of a preliminary injunction sought by the tribal lenders to prevent the DFS from interfering with the tribes’ consumer lending business by barring these loans and pressuring banks and NACHA to cease doing business with the tribes.

The case arose from DFS actions in the summer of 2013 to regulate out-of-state payday lenders. The DFS sent cease-and-desist letters to a number of online payday lenders identified as having made loans to New York residents, accusing them of using the Internet to make high-interest loans in violation of the state’s usury laws. The tribal lenders received the letter. The DFS also wrote to financial services industry participants who were involved in the lenders’ financing processes, such as banks and NACHA, the operator of the Automated Clearing House (ACH) payment system. The agency’s letters urged these participants to take actions to assure that they not provide a pipeline for the supposedly illegal loans.

The tribal lenders contended that the DFS’s actions “had immediate and devastating effects” on them, causing the banks and NACHA to end their relationships with the lenders. This, in turn, shut down the lenders’ transactions “not just with New York borrowers, but with consumers in every other state in the union.” The Second Circuit noted the competing views of the DFS’s actions: the tribal lenders described the actions “as a ‘market-based campaign explicitly designed to destroy Tribal enterprises,’ and New York... defend[ed] [its actions] as a ‘comprehensive effort to determine how best to protect New Yorkers from the harmful effects of usurious online payday loans.’”