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Short term lending restrictions by New York regulators leads to job loss

Oct 01, 2013 Quinn Thomas

A major legal battle regarding the short term lending industry is currently underway in New York. The proceedings involve state financial regulators and small dollar Native American online lenders that have been barred from operating within the state.

Last month, New York's head financial regulator, Benjamin Lawsky sent cease and desist letters to a number of short term loan providers that offer products to consumers via the Internet. Many of the organizations targeted by Lawsky are Native American groups conducting business on reservations outside of New York. Extensive legal precedents ensuring sovereign status for native tribes have in place for years. For this reason, many native lenders have filed challenged Lawsky's actions.

The New York Times recently reported that two American Native presented their argument to the Federal District Court in Manhattan, saying that Lawsky had no right to act in such a manner. Legal representatives for the Otoe Missouria Tribe and the Lac Vieux Desert Band of Lake Superior Chippewa Indians - the two native groups that filed the lawsuit against Lawsky - stated that the actions taken by New York officials are nothing short of disrespectful.

"My clients' businesses are being destroyed because New York has decided that tribal sovereignty doesn't matter to them," the tribes' lawyer David Bernick told the district court, according to the source. "This is an exercise in arrogance, and people are suffering as a result."

Jobs destroyed
One lending company that has already experienced difficulties from the zealous regulatory move is Western Sky Financial. The New York Times reported that the company was sued by Eric Schneiderman, New York's attorney general, after Lawsky sent letters to various lenders. As a result of the lawsuit, Western Sky suspended its activities and has already laid off about 100 employees. Strictly speaking, Western Sky isn't a protected lender, but a situation like this could occur within the other companies if these actions continue.

Native lending groups rely heavily on the financial support they receive from online lending activities. Many tribes are located on remote reservations, which may make it difficult for them to conduct business, which has led many to utilize short term lending practices to support themselves. Because they are indeed sovereign groups, federal funding is scarce, meaning that Native nations must find ways to support themselves.

Despite little support from the government, tribes have found novel, innovative and legal ways to support their actions. Now, New York officials regulators are putting the financial stability of these groups in serious jeopardy.

Federal official admits regulatory limitations
The hypocrisy is there for all to see. New York regulators are fine with the lack of funding Native groups are provided because of their sovereign status but are aggressively attempting to regulate their activity in the state, a violation of their independence. It's a case of having your cake and eating it too.

What's more damaging to Lawsky's case is that federal organizations have even stated that they have little ability to regulate online lending. The Wall Street Journal recently reported that Richard Cordray, the director of the Consumer Financial Protection Bureau, said his organization would find it difficult to successfully argue that they have the jurisdiction to regulate online small dollar lending.

Clearly there is a lack of fundamental knowledge regarding the sovereign nature of Native tribes and the operations of the short term industry. The practice is barred in 15 states and is highly regulated across the country. Many states allow such loans to last no more than 60 days, which is a significantly more limited payment period that is typical of other consumer loan products. Instead of regulating the industry into submission, Lawsky and other regulators across the country should attempt to support online Native lenders that are central to the financial success of their nations.