Nearly 20 states have either banned payday lenders or imposed interest rate caps that discourage them from setting up shop.
But a new report from the Center For Public Integrity shows that some payday lenders are finding a way around these limits by teaming up with Native American tribes.
"One of the ways that payday lenders have tried to get around state laws is by operating on the Internet, rather than from the strip mall storefronts that we're used to seeing," says Michael Hudson, one of the authors of the report.
He tells Morning Edition host Renee Montagne that some states have tried to crack down on this practice.
But California regulators who tried to shut down a group of online payday lenders were surprised when lawyers for the Miami Nation of Oklahoma and the Santee Sioux Nation of Nebraska "pushed their way into the case," Hudson says.
The tribes' lawyers "said these lenders are owned and operated by the tribes and, therefore, they enjoy tribal nation sovereignty, which makes them immune to state laws," Hudson says.
Annual Interest Rates Of 400 Percent Or More
Payday lenders make small short-term loans. In a typical transaction, a customer might pay a $50 finance charge to borrow $300, which is scheduled to be paid back two weeks later, when the customer's next paycheck comes around. Hudson says the cost of these loans often works out to "annual interest rates of 400 percent or more."
Payday lenders say they provide a reasonably priced service — a bargain when compared to bank overdraft fees or reconnection charges for unpaid utility bills.
"But critics say often, borrowers can't cover repayment, so they're forced to roll over their loans multiple times, and the fees start accumulating like a cartoon snowball rolling down the hill," Hudson says.
Tribal Connections
So, how are tribes involved in these financial transactions?
"Attorneys for the tribe say that the lenders are legitimate arms of the tribes and that the loans are approved on Native American land," Hudson says.
Tribes also say that generations ago, they were forced to relocate to wastelands and that they need an industry that can provide them with income to pay for police protection, housing and other services.
"If the tribes are legitimately running the show and actually owning and operating these lenders, then it might be difficult for many states to regulate them," Hudson says.
This could also make it tough to implement financial reforms under way in the aftermath of the financial crisis.
"The folks who want tougher regulations on lenders have some pretty strong adversaries in the financial industry — whether its payday lenders or mortgage lenders," Hudson says. "The lenders have many lawyers on retainer who spend a lot of time thinking — reading the laws and figuring out how they can avoid getting put out of business."
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