Why are New York State authorities vexing Indian tribes?
Article I, section 8, clause 3 of the United States Constitution empowers Congress exclusively "To regulate commerce with the Indian tribes." States are ousted from jurisdiction for good reason. They have often been the deadliest enemies of Native Americans. Yet the Superintendent of New York's Department of Financial Services, Ben Lawsky, has unleashed a regulatory war against sixteen Indian tribes and other entities for online lending to willing borrowers at interest rates exceeding the state's 25 percent ceiling for short-term, payday loans. Superintendent Lawsky has sent cease-and-desist letters to 35 lenders and 112 banks providing or facilitating short-term, high-interest payday loans to consumers online at rates that exceed New York's cap.
Mr. Lawsky is not only trespassing on Indian tribal sovereignty. He is also frustrating the commendable initiatives of Indian tribes to promote employment and economic self-sufficiency and to accommodate the credit needs of New York residents. The advent of the Internet era opened opportunities for Tribal Nations because e-commerce requires limited capital and infrastructure investment. Tribal Governments with little or no gaming capacity now enjoy a chance to prosper. One attractive opportunity is consumer lending. Advances in technology, data, and analytics have facilitated the underwriting of sophisticated online consumer lending products for unbanked borrowers.
The Tribal Governments have created Tribal Corporations and formed Tribal Regulatory Agencies to regulate, monitor, and oversee online consumer lending. The products Tribal Corporations offer benefit a subset of consumers without access to traditional bank lending. According to the National Survey of Unbanked and Underbanked Households, an estimated 8.2% of United States households (approximately 17 million adults) lack a checking or savings account, or are "unbanked." In addition, an estimated 20.1% (51 million adults) are "underbanked," i.e., persons "that have a checking and/or savings account and had used non-bank money orders, non-bank check cashing services, non-bank remittances payday loans, rent-to-own services, pawn shops, or refund anticipation loans (RAL's) in the past 12 months." If the New York Superintendent has his way, New York customers of the Tribal Corporations might plunge into a financial abyss.
Price controls on any product or service are problematic, including New York's regulation of interest rates. George Washington's revolutionary army nearly starved to death thanks to price controls on food that were imposed by Pennsylvania and sister colonial governments. Pennsylvania imposed price controls on "those commodities needed for use by the army," which predictably created disastrous shortages of what was needed.
Superintendent Lawsky's misguided economic attack against the online lending of Tribal Corporations is also illegal. New York lacks constitutional authority to regulate Indian tribal activity on tribal reservations. Only the federal government commands such power.
The Tribal Nations offer credit products from their reservations. Their lending operations are physically located there. They employ tribal members on the reservations. They make business decisions there. The loan application process takes place through a website owned and controlled by the Tribal Nation. The website informs customers that loans are subject to the exclusive laws and jurisdiction of the Tribal Nation. Potential consumers complete an application; and, the application is reviewed and assessed by the Tribal Nation's loan underwriting system. The ultimate authority to make a loan is entrusted to the Tribal Corporation. Upon approval of a loan application, the Corporation notifies the borrower, and the loan agreement is made available for electronic signature. Loans are funded by bank accounts owned by the Tribal Nations.
Chief Justice John Marshall taught in Cherokee Nation v. Georgia (1831): "[Indian tribes] may, more correctly, perhaps, be denominated domestic dependent nations. They occupy a territory to which we assert a title independent of their will, which must take effect in point of possession when their right of possession ceases. Meanwhile they are in a state of pupilage. Their relation to the United States resembles that of a ward to his guardian." The Chief Justice added in Worcester v. Georgia (1832) in nullifying a state regulation of Indian affairs: "The treaties and laws of the United States contemplate the Indian territory as completely separated from that of the States, and provide that all intercourse with them shall be carried on exclusively by the government of the Union." And in United States v. Kagama (1886), the Supreme Court explained: "These Indian tribes are the wards of the nation. They are communities dependent on the United States,-dependent largely for their daily food; dependent for their political rights. They owe no allegiance to the states, and receive from them no protection. Because of the local ill feeling, the people of the states where they are found are often their deadliest enemies. From their very weakness and helplessness, so largely due to the course of dealing of the federal government with them, and the treaties in which it has been promised, there arises the duty of protection, and with it the power."
The federal government has stayed its hand in regulating online consumer lending of Indian tribes. Congress debated nonbank lending during its consideration of the Dodd-Frank Act. It delegated the question of regulatory controls to the Consumer Financial Protection Bureau "CFPB"), which has yet to decide.
The Act is unambiguous that Congress intended to shield Tribal Nations from regulation by the States by treating any federally recognized Indian tribe on a sovereign par with States themselves. The Department of the Treasury has elaborated that the Dodd-Frank Act "[e]mpower[s] tribal governments... to enforce the [CFPB]'s rules in areas under their jurisdiction, the same way that states will be permitted to enforce those rules." And under the Supreme Court's decision in Chevron U.S.A. v. N.R.D.C. (1984) and its progeny, the interpretation of federal statutes by regulatory agencies entrusted with their enforcement commands great judicial deference.
In a wooden, ill-reasoned decision on September 30, 2013, United States District Judge Richard J. Sullivan denied the Tribal Nations' motion for a preliminary injunction against Superintendent Lawsky's regulatory war in The Otoe-Missouri Tribe of Indians, et al. v. New York State Department of Financial Services. The District Court declared that on-line Internet lending occurs in and may be regulated by the jurisdiction of the borrower, not the lender. That precedent would require Indian Tribes to splinter their on-line lending operations inefficiently among 50 different state jurisdictions. The opposite conclusion of Judge Sullivan that on-line lending occurs in the jurisdiction of the lender is equally if not more metaphysically compelling. It is accepted law that defamation on the Internet is committed in the jurisdiction of the writer or speaker, not the defamed reader or listener. Why should Internet lending be treated differently? Even conceding ambiguity regarding the location of Tribal Nations' on-line lending, the jurisdictional issue should be resolved in favor of the strong federal policy of tribal self-sufficiency.
Judge Sullivan's ruling should be reversed on appeal to the U.S. Court of Appeals for the Second Circuit.
*Bruce Fein was associate deputy attorney general under President Reagan and is an internationally acclaimed constitutional attorney.