New York Attorney General Eric Schneiderman sued an online lender with ties to an American Indian tribe and its affiliates Monday, alleging they charged interest rates to low-income New Yorkers that were more than 10 times higher than state law allows.
Mr. Schneiderman accused Western Sky Financial LLC and its affiliates, WS Funding LLC and CashCall Inc., of acting “in concert” in an alleged scheme to make loans at more than 355% annual interest.
The lawsuit poses a key test for regulators who have begun cracking down on online lenders, including those affiliated with Indian tribes. Government officials say the lenders are violating state interest-rate caps and consumer-protection laws, but tribes say they are immune because they operate as sovereign governments.
On Monday, a group of 16 tribes that offer short-term loans over the Internet sent a letter to Benjamin Lawsky, New York’s top banking regulator, saying they wouldn’t comply with cease-and-desist orders he issued last week.
Tribes also are challenging the authority of the Consumer Financial Protection Bureau, which has broad powers to police online lending, according to people familiar with the matter. The CFPB sent civil subpoenas in mid-2012 to several tribal lenders seeking information about their operations, but the tribes haven’t complied, arguing the CFPB doesn’t have the authority to demand the information from another government, these people said.
Barry Brandon, executive director of the Native American Financial Services Association, which represents 16 tribes that have lending operations, said the tribes want to have a “government-to-government” relationship with the CFPB. “We share their concerns with ensuring that businesses are properly run,” Mr. Brandon said. The association doesn’t represent Western Sky.
CFPB officials say they have broad authority over financial products sold to consumers, including lenders on tribal lands. If lenders engage in “in unfair, deceptive or abusive practices, the bureau will hold those institutions accountable,” a spokeswoman said.
Uncertainty over the legal status has prompted regulators to try and cripple lenders’ activities by moving to block access to essential banking services needed to process transactions. State and federal regulators are warning banks not to process transactions for online lenders. The strategy could help navigate legal issues that have hamstrung efforts to shut down or limit certain online lending activities.
Courts have long upheld that tribal-owned businesses enjoy the same sovereign immunity as tribal governments and aren’t subject to state law. Matthew Fletcher, director of Michigan State University’s Indigenous Law and Policy Center, said the ownership structure of a firm has bearing on its legal defenses in such situations. Lenders owned by an individual member of a tribe but not deemed to be owned by the tribe itself would have less ground in attempting to block lawsuits or other state action, he said.
“I would assume the tribe and the tribal entity would respond by saying you don’t have jurisdiction over the tribal nation,” Mr. Fletcher said.
In the lawsuit, Mr. Schneiderman alleges Western Sky and CashCall “mistakenly assert” that laws of Cheyenne River Sioux Tribe apply to their loans. “In fact, Western Sky is a limited liability company organized and registered under South Dakota law,” the suit said. “It is not owned or operated by the Cheyenne River Sioux Tribe, and several courts have already rejected claims of tribal immunity made by Western Sky and its owner, Martin Webb.”
The lawsuit alleges Western Sky was responsible for making the loans, which it sold to WS Funding, a CashCall subsidiary. The lawsuit alleges many borrowers ended up owing several times the amount they received. New York state considers annual interest rates above 25% criminal.
Mr. Schneiderman is suing Mr. Webb and J. Paul Reddam, president and owner of CashCall. A statement provided by an attorney representing Western Sky and Messrs. Webb and Reddam said the company is confident it complied with all applicable laws and that Western Sky’s transactions with borrowers are “governed by the laws of the Cheyenne River Sioux Tribe.”
“Any issues arising out of Western Sky’s operations are subject to the jurisdiction of the tribe,” the statement said.
- By ANDREW R. JOHNSON, REED ALBERGOTTI and ALAN ZIBEL