The federal regulator sued four online lenders affiliated with a Native American tribe in Northern California, alleging they violated federal consumer protection laws by making and collecting on loans with annual interest rates starting at 440% in at least 17 states.
In a lawsuit filed Thursday in U.S. District Court in Chicago, the bureau alleged that Golden Valley Lending, Silver Cloud Financial and two other lenders owned by the Habematolel Pomo of Upper Lake tribe violated usury laws in the states and thereby engaged in unfair, deceptive and abusive practices under federal law.
"We allege that these companies made deceptive demands and illegally took money from people’s bank accounts. We are seeking to stop these violations and get relief for consumers,” CFPB Director
Since at least 2012, Golden Valley and Silver Cloud offered online loans of between $300 and $1,200 with annual interest rates ranging from 440% to 950%. The two other firms, Mountain Summit Financial and Majestic Lake Financial, began offering similar loans more recently, the bureau said in its release.
Lori Alvino McGill, an attorney for the lenders, said in an email that the tribe-owned businesses plan to fight the CFPB and called the lawsuit "a shocking example of government overreach."
"The CFPB has ignored the law concerning the federal government's relationship with tribal governments," said McGill, a partner at Washington, D.C., law firm Wilkinson Walsh & Eskovitz. "We look forward to defending the tribe's business."
The case is the latest in a handful of moves by the CFPB and state regulators to rein in the tribal lending industry, which has grown in recent years as many states have tightened regulations on payday loans and similar types of small consumer loans.
Tribes and tribal entities are not subject to state laws, and the lenders have argued that they are allowed to make loans irrespective of state interest-rate caps and other rules, even if they are lending to borrowers outside of tribal lands. Some tribal lenders have even fought the CFPB's demand for records, arguing that they are not subject to supervision by the bureau.
Like other cases against tribal lenders, the CFPB's suit against the Habematolel Pomo tribe's lending businesses raises tricky questions about tribal sovereignty, the business practices of tribal lenders and the authority of the CFPB to indirectly enforce state laws.
The bureau's suit relies in part on a controversial legal argument the CFPB has used in several other cases — that implied violations of state law can amount to violations of federal consumer protection laws.
The core of the bureau's argument is this: The lenders made loans that are not legal under state laws. If the loans aren't legal, the lenders have no right to collect. So by continuing to collect, and continuing to tell borrowers they owe, the lenders have engaged in "unfair, deceptive and abusive" practices.
Critics of the bureau balk at this argument, saying it amounts to a federal agency overstepping its bounds and trying to enforce state laws.
"The CFPB is not allowed to create a federal usury limit," said Scott Pearson, an attorney at Ballard Spahr who represents lending firms. "The industry position is that you should not be able to bring a claim like this because it runs afoul of that limitation of CFPB authority."
In a less controversial allegation, the CFPB alleges that the tribal lenders violated the federal Truth in Lending Act by failing to disclose the annual percentage rate charged to borrowers and expressing the cost of a loan in other ways — for instance, a biweekly charge of $30 for every $100 borrowed.
Other recent cases involving tribal lenders have hinged less on the applicability of various state and federal laws and more on whether the lenders themselves have enough connection to a tribe to be shielded by tribal law. That's likely to be an issue in this case as well.
In a suit filed by the CFPB in 2013, the bureau argued that loans ostensibly made by Western Sky Financial, a lender based on the Cheyenne River Sioux tribe's reservation in South Dakota, were really made by Orange County lending firm CashCall. A federal district judge in Los Angeles agreed in a ruling last year, saying that the loans were not protected by tribal law and were instead subject to state rules.
The CFPB seems prepared to make a similar argument in the latest case. For instance, the lawsuit alleges that most of the work of originating loans happens at a call center in Overland Park, Kan., not on the Habematolel Pomo tribe's lands. It also alleges that money used to make loans came from non-tribal entities.
McGill, the tribe's attorney, said the CFPB "is wrong on the facts and the law." She declined additional comment.
However, the tribe defended its lending business last year in remarks to members of the House Financial Services Committee, who were conducting a hearing on the CFPB's attempt to regulate small-dollar lenders, including those owned by tribes.
Sherry Treppa, chairwoman of the Habematolel Pomo tribe, said the tribe's decision to enter the lending business "has been transformative," providing revenue used to pay for an array of tribal government services, including monthly stipends for seniors and scholarships for students.
"Without tribal lending, these programs would be impossible," she said.
California is not among the states where the CFPB alleged violations.
The 17 states are Arizona, Arkansas, Colorado, Connecticut, Illinois, Indiana, Kentucky, Massachusetts, Minnesota, Montana, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio and South Dakota.
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4 p.m.: This article was updated with more details from the lawsuits, analysis of the CFPB's action and comments from lender attorney Lori Alvino McGill and tribal Chairwoman Sherry Treppa.