The payday lending industry has taken many a hit over the past couple of years as state after state impose limitations on the interest rates charged that made this such a lucrative business. Now, some payday lenders have found a new strategy that allows them to overcome local restrictions: partnering with American Indian tribes.
Industry expert Jer Ayler told WalletPop that online payday lenders that partner with tribes are able to take advantage of the tribe's sovereignty, allowing them to disregard states regulations.This has already been challenged unsuccessfully in court. In December of 2008 a California court ruled in favor of five companies asserting tribal immunity due to their relationship with tribes including the Miami Tribe of Oklahoma and the Santee Sioux Nation.
One lender, for example, American Web Loan, charges Ohioans a 364% annual percentage rate for loans up to $800 if paid off in 30 days, terms not untypical for this industry. American Web Loan operates under the Otoe-Missouria Tribe.
This may not be the ultimate solution for online lending, though. Ayler said "I don't think the reservation thing is the future at all." He points out that it is expensive to operate within the regulations for a sovereign nation, which would require the server, the call center, and all other operations to take place on the reservation.
This puts these sites in competition with many other online sites that are off-shore, in places like Belize, Costa Rica and Panama, sites that are outside U.S. regulation.
You may not even recognize that you're dealing with a foreign company; look under terms of agreement for text such as this, from Nationalpayday.com: "Each aspect of, communication, and transaction, with/on this site will be deemed to have occurred in NationalPayday.com's Costa Rica offices, regardless of the location where you are accessing or viewing this site."
Ayler sees a future in the peer-to-peer lending model of sites like Kiva, perhaps as a model that will soften the payday loan market.
He cautions however, that some form of short-term, uncollaterized loans has been part of human civilization since the inception of money, and won't go away if payday loan companies are shuttered. He would rather have us, "Embrace it, control it, disclose it."
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