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Lisa landed in the hospital twice in two months and couldn’t work. Abigail and her children were evacuated after a hurricane without knowing where to go or how to pay. Leia needed help with her bills when her paycheck wasn’t processed on time.
These three women found themselves in a financial emergency and needed quick access to cash. They didn’t have time for credit card approvals. Leia said she “stayed up all night crying” because she didn’t think her credit was good enough to get a loan. They each found light in their financial darkness through tribal loans: short-term loans of small dollars made available by Native American tribes and the businesses they control.
These loans are derided by their critics as predatory due to high interest rates and the possibility that customers find themselves in a repeat borrowing cycle with five or more loans per year, according to the Center for Responsible Lending.
But industry advocates and many borrowers themselves say the small loans are a quick cash injection for people who can’t qualify for traditional loans or need to borrow smaller amounts than what offered by traditional lenders.
“If they could get a loan from the local bank, that’s what they would do,” said Brendan Johnson, a former U.S. District Attorney for the District of South Dakota, who now advises Native American tribes on federal legislation in loan material. “The problem is that no one 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 dampen an industry that the Center for American Progress says typically targets low-income borrowers and people of color. But the typical borrower of tribal loans and other online loans fits a different profile.
According to a recent survey by the Online Lenders Alliance, only 3% of non-graduates surveyed have taken out short-term personal loans, while 7% of postgraduates have taken on the same type of debt. And while only 4% of those earning less than $50,000 a year have taken out such loans, 8% of those earning more than $100,000 a year have.
The markets are therefore different, even though the proposed federal regulation would affect both sectors.
Several states have sued tribal loan companies using regulatory measures targeting so-called “payday loans.” Tribal advocates reject payday loan comparison. According to the Native American Financial Services Association (NAFSA), they offer “installment” loans that have set loan terms and require payments that go toward loan principal and interest. “Installment loans help deter the cycle of debt perpetuated by multiple uncontrolled rollovers,” they said in a statement.
The tribes use the proceeds from these loans to fund government services and programs for their members, as well as “to augment funding for the ever-diminishing federal grant program,” according to the association’s website. This further reinforces tribal sovereignty.
The loans also provide tribes with an alternative to gambling as a source of income and employment. As deep-pocketed players like Draft Kings enter the game – literally – the tribes and their members need more economic opportunity.
There are 574 federally recognized Native American tribes. Since receiving congressional permission under the Indian Gambling Regulation Act 1988 to conduct gambling activities, many tribes have pursued this as an important part of their economic strategy. Now some want to diversify.
“As tribes seek to diversify their economic portfolios, many face a major hurdle: Because many tribes’ reservations are geographically isolated and far from urban population centers, traditional forms of trade do not provide not the necessary level of economic activity and opportunity,” said Andrew Duke, executive director of the Association of Online Lenders. “As an e-commerce business line, online lending has become a lifeline and prime revenue generator. In addition to generating essential revenue to fund their governments, these businesses also create jobs and other opportunities for tribal members.
The United States government recognizes the right of Native American and Alaska Native tribes to govern themselves under tribal sovereignty. With few exceptions, tribes have powers similar to federal and state governments to control their internal affairs. But while tribes must abide by federal laws, state laws do not apply to them. For e-commerce activities such as lending, this exempts tribes from rate caps that some states have imposed on short-term, small-dollar loans.
Activist lawyers have filed a wave of lawsuits against indigenous tribes for their lending activities, lawsuits that undermine tribal sovereignty. The lawsuits have a similar theme: the loan companies aren’t actually owned by the tribes, but operate under a “rent-a-tribe” program to protect lenders from state laws. One such case in Illinois accused the online tribal lender of violating the Predatory Lending Prevention Act of 2021 by charging nearly 700% interest on loans.
This concept of “rent-a-tribe” has a flavor of racism, according to Adam Crepelle, director of the Tribal Law and Economics Program and assistant professor of law at the Antonin Scalia Law School of George Mason University, resorting to the pejorative character image of Native Americans as fools unable to engage in complex e-commerce and in need of protection.
In a 2021 article examining stereotypes that undermine tribal sovereignty, Crepelle included a telling quote from a Seattle Times article about the Makah Tribe’s takeover of whaling activities. “Wake up in your teepee, put on your buffalo skin, paddle in your canoe and ram it with a wooden harpoon. Until then, spare us the ‘spiritual existence’ nonsense,” the quote reads.
Crepelle said this stereotype persists despite growing sophistication among tribes, which includes the creation of regulatory bodies to oversee e-commerce activities.
Johnson, who serves on the Tunica-Biloxi Tribal Loans Regulatory Commission, said more than a dozen tribes regularly participate in the Conference of Tribal Loan Commissioners, an internal body that shares best lending practices.
“Tribes continue to fight to protect their rights today,” according to NAFSA.
Additionally, according to Crepelle, physical storefronts or infrastructure for traditional commerce involves obtaining leases from the US government for land use.
“It causes a lot of problems for economic development,” Crepelle said.
As state efforts failed to curb tribal activity, activists turned to federal lawmakers. Last year, Senate Democrats reintroduced a 2006 bill that would cap all consumer loans at 36%, despite analysis by the National Bureau of Economic Research indicating that those rates limit access to credit to those who need it most. According to the Bank Policy Institute, lenders must charge at least 140% of APR to break even on small loan amounts, which also said looking at annual rates is a poor way to analyze fees on short-term loans.
John Berlau, director of financial policy and senior fellow at the Competitive Enterprise Institute agrees.
“APR is an imperfect and outdated measure of the cost of short-term credit that leads many cash-strapped consumers to misunderstand the options available. Worse, by distorting the political debate, the APR leads politicians at both the federal and state levels to propose the prohibition of these options to the detriment of borrowers in situations of poverty.
“As an example of the APR distortion, consider a two-week $200 consumer loan with $40 interest charges. This loan has an interest rate of 20% if repaid during its term. But if that loan is extended for a full year, which rarely, if ever, happens, the annual interest rate would be 520%. Yet federal law requires that 520% be disclosed as the official interest rate for this loan. As the great economist Thomas Sowell points out, “Using this kind of reasoning – or lack of reasoning – you could…say that a hotel room rents for $36,000 a year, [but] few people stay in a hotel room all year round.
“For the sake of those who really need a little short-term credit, policymakers shouldn’t let the distortion of the APR inform 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 in an interview with NPR said tribes are often the biggest employers in their area.
“It just creates jobs that didn’t exist ten years ago,” Trahant said.
