Lisa ended up in the hospital twice in two months and was unable to work. Abigail and her children were evacuated after a hurricane without knowing where to go or how to pay for it. Leia needed help with her bills when her paycheck wasn’t processed on time.
These three women were in dire straits and needed quick access to cash. They didn’t have time for credit card approvals. Leia said she “stayed up crying all night” because she felt her credit was not good enough to secure a loan. They all found light in their financial darkness through tribal loans: short-term small loans made available by Native American tribes and companies controlled by them.
These loans are ridiculed by their critics as predatory because interest rates are high and customers may fall into a cycle of repeated borrowing of five or more loans a year, according to the Center for Responsible Lending.
But industry advocates and many borrowers themselves say small loans are a quick cash injection for people who don’t qualify for traditional loans or who need to borrow smaller amounts than traditional lenders are offering.
“If they could get a loan from the local bank, they would,” said Brendan Johnson, a former US Attorney for the District of South Dakota who now advises Native American tribes on federal laws related to lending. “The problem is nobody wants to lend them money.”
Payday loans have been a particular target of progressive politicians like Sen. Elizabeth Warren (D-Mass.) who want more government regulation of the industry and more restrictions on lending rules. Those rules could rein in an industry that typically targets low-income borrowers and people of color, according to the progressive Center for American Progress. But the typical borrower of tribal and other online loans fits a different profile.
According to a recent Online Lenders Alliance survey, just three percent of non-college graduates surveyed had short-term personal loans, while seven percent of postgraduates had the same type of debt. And while only 4 percent of those earning less than $50,000 a year had such loans, it was 8 percent of those earning more than $100,000 a year.
The markets are therefore different, even if the proposed federal regulation would affect both sectors.
Several states have cracked down on tribal loan companies by introducing regulations targeting so-called “payday loans.” Tribal advocates reject payday loan settlement. According to the Native American Financial Services Association (NAFSA), they offer “installment” loans that have specific credit terms and require payments that count towards the loan amount and interest. “Installment loans help prevent the cycle of debt that is perpetuated by multiple, unaudited rollovers,” it said in a statement.
The tribes use the profits from these loans to fund state services and programs for their members and to “add to ever-dwindling funding for the federal grant program,” according to the association’s website. This further strengthens tribal sovereignty.
Lending also provides tribes with an alternative to gambling as a source of income and employment. When financially strong players like Draft Kings come into play – literally – tribes and their members need more economic opportunities.
There are 574 federally recognized Native American tribes. Since being permitted by Congress to engage in gambling activities under the Indian Gaming Regulatory Act of 1988, many tribes have embraced it as an important part of their economic strategy. Now some want to diversify.
“When tribes attempt to diversify their economic portfolios, many face a major hurdle: Because many tribes’ reservations are geographically isolated and remote from urban population centers, traditional forms of trade do not provide the necessary level of economic activity and opportunity. said Andrew Duke, Executive Director of the Online Lenders Association. “As an e-commerce business, online lending has become a lifeline and a major source of income. Not only do these companies generate revenue that is essential to fund their governments, but they also create jobs and other opportunities for tribal members.”
The United States government recognizes the right of Native American and Alaskan tribes to govern themselves under tribal sovereignty. With few exceptions, the tribes have powers similar to federal and state governments to control their internal affairs. But while tribes must obey federal laws, state laws do not apply to them. For e-commerce activities like lending, this frees tribes from interest rate caps that some states have set on short-term small loans.
Activist lawyers have filed a number of lawsuits against indigenous tribes over their lending operations, lawsuits that undermine tribal sovereignty. The lawsuits share a similar theme: the lending companies are not actually owned by the tribes, but operate under a “rent-a-tribe” scheme to protect lenders from state laws. In one such case in Illinois, the tribal online lender was accused of violating the Predatory Loan Prevention Act of 2021 by charging nearly 700 percent interest on loans.
There is an edge to racism in this concept of “rent-a-tribe,” according to Adam Crepelle, director of the Tribal Law and Economics Program and assistant professor of law at George Mason University’s Antonin Scalia Law School, who draws on the pejorative image of American Native Americans as simpletons who cannot conduct complex e-commerce and need protection.
In a 2021 paper examining the stereotypes that undermine tribal sovereignty, Crepelle included a revealing quote from a Seattle Times article about the Makah Tribe’s resumption of whaling activities. “Wake up in your teepee, put on your buffalo skin, paddle out in your canoe and stab it with a wooden harpoon. Until then, spare us the nonsense of ‘spiritual existence,'” the quote reads.
Crepelle said this cliché persists despite increasing sophistication among tribes, which includes the creation of regulators to oversee e-commerce activity.
Johnson, who sits on the Tunica-Biloxi Tribal Lending Regulatory Commission, said more than a dozen tribes regularly attend the Conference of Tribal Lending Commissioners, an internal body that shares best lending practices.
“Tribes continue to fight to protect their rights today,” NAFSA said.
Additionally, according to Crepelle, physical storefronts or infrastructure for traditional commerce must receive leases from the U.S. government for land use.
“This causes many problems for economic development,” Crepelle said.
With state efforts insufficient to curb tribal activity, activists have turned to federal lawmakers. Last year, Senate Democrats introduced a 2006 bill that would limit all consumer credit to 36 percent, though analysis by the National Bureau of Economic Research suggests such rates limit access to credit to those who need it most. According to the Bank Policy Institute, lenders must charge at least 140 percent APR to breakeven on small-dollar loans. The Bank Policy Institute also said that looking at APRs is a poor way to analyze short-term loan fees.
John Berlau, director of fiscal policy and a senior fellow at the Competitive Enterprise Institute, agrees.
“The APR is an erroneous, outdated measure of the cost of short-term borrowing that causes many cash-strapped consumers to misunderstand the options available. Worse, by distorting policy debate, the APR is leading federal and state politicians to propose banning these options at the expense of borrowers in poverty.
“As an example of the APR skewing, consider a two-week consumer loan of $200 with an interest charge of $40. This loan carries an interest rate of 20 percent if repaid within its term. But if that loan is rolled over for a full year, which rarely or never happens, the annual interest rate would be 520 percent. However, federal law requires that 520 percent be disclosed as the official interest rate on this loan. As the great economist Thomas Sowell points out, “With that kind of reasoning – or lack of reasoning – one could say… that a hotel room is rented at $36,000 a year, [but] few people stay in one hotel room all year round.”
“For those who really need short-term small loans, policymakers shouldn’t let the APR bias sway the debate.”
Meanwhile, tribal leaders continue to fight what they see as an attack on their sovereignty and the economic future of their members. Indian Country Today reporter Mark Trahant commented in an interview with NPR that tribes are often the largest employers in their area.
“It just creates jobs that didn’t exist a decade ago,” Trahant said.