CFPB Is Barking Up the Wrong Tree

Harold Monteau

The Consumer Finance Protection Bureau (CFPB), in pursuing the Tribes and their lending entities, is ignoring the real culprits in setting up these Tribal Lending Entity(s) (TLE) business arrangements, the non-Indian companies who rake off as much as 99 percent of the profits.

The CFPB has pursued civil enforcement actions against TLE (Some are organized as corporations and others are “arms of the Tribe” under ordinances or resolutions.). In at least one of these enforcement actions (now pending decision in the 9th Circuit) the CFPB is taking the position that because the Consumer Finance Protection Act (CFPA), part of the Dodd-Frank Act, is a “federal law of general applicability”, it applies to Tribes and Indians even though there is nothing in the CFPA that says that. In fact the CFPA only mentions Tribes in the definition of “State” in the Act and, under the Act, States are recognized as “co-regulators”. The Tribes take the position that, because the Act includes them in the definition of State, they are recognized as co-regulators under the Act and not “persons, corporations or lending entities” that Congress meant to be regulated by the CFPB.

The CFPB, in its zeal to take after Tribal Lenders, is arguing that it even has authority over the States and their lending entities (Student Loan, State Housing Development, State Economic Development entities and any other State Agency that lends money.) They can point to nothing in the act that grants them such wide authority but they are taking the legal position that they have this authority over States and Tribes. The States are not involved in the case and haven’t asked to be part of it. So I guess they’ll live with the results if the 9th Circuit and U.S. Supreme Court give the CFPA the interpretation that CFPB wants. Maybe they feel that anything that limits Tribal commerce that does not have to follow state law or regulations, is a good thing.

In taking this stand the CFPB (an agency of our “Trustee”) is about to set a precedent that will take a very, very large chunk of “Tribal Sovereignty” out of what’s left of it. It won’t be just the Tribal Lending Industry that will have to live with such a decision. Any federal act of general applicability (Labor Laws, OSHA, etc.) will suddenly all apply to Tribes. The Casino Tribes are fighting the jurisdiction of the National Labor Relations Board (NLRB). Good luck if CFPB gets its way in the 9th Circuit. You may have to incrementally expand that fight to other Federal Agencies.

 Unfortunately for the Tribes, the Federal 9th Circuit Court of Appeals is the worst Circuit Court into which this case may have been brought. The 9th Circuit has ruled in the past that federal statutes of general applicability (OSHA for instance) apply to Tribes, even if they are silent as to Tribes, and, if Congress did not specifically except Tribes from such acts, then they apply. Other Courts have reached the opposite opinion; that unless an Act specifically “includes” Tribes, they are not subject to a federal act of general applicability. The latter has been “the law”, or assumed to be the law, for a century or so, but not in the 9th Circuit.

One reason the Supreme Court will review a case is if there are opposite decisions in two or more Federal Courts of Appeal. If the 9th Circuit case ever makes its way to the Supreme Court, it could make a decision against the Tribes that would have repercussions far beyond just the CFPA and the application of federal consumer law to Tribes. I don’t like our chances. We’d all have to live with the consequences with numerous federal agencies claiming jurisdiction over Tribes under statutes where Congress did not even consider Tribes, but didn’t have the foresight to exempt us.

What the CFPB is doing, in trying to claim such expansive jurisdiction over States and Tribes, is not consistent with the legal positions the U.S. Department of Justice (DOJ) is taking against the Non-Indian Partners and Investors that convinced the Tribes to set up the lending businesses. DOJ alleges that the business model used is a “Rent-a-Tribe” scheme that fraudulently and/or criminally allows a Non-Indian PayDay Lender to hide behind Tribal Sovereign Immunity and break Federal and State Consumer Finance Protection laws. U.S. Attorneys are alleging that the “real owners in interest” are the non-Indian former PayDay Loan Companies or the non-Indian investors that take 90% or so of the benefit, leaving the Tribes with a pittance, relatively. This is the legal position that CFPB should be taking, and not making an attempt to greatly harm Tribal Sovereignty. I don’t think that Richard Cordray (CFPB Director) has even considered the harm he would do to Tribes. So we have one branch of our Trustee (DOJ) saying that Tribes really don’t “own” these businesses and another branch of our Trustee (CFPB) saying we do own them but that the activities engaged in violate Federal Consumer Protection Law and State Law. We all know what the usual outcome is when our “Trustee” decides that State’s rights are more important than Tribal rights.

DOJ may be on the right track, since Federal (Indian Preference), State (minority preference) and Tribal Law (TERO Ordinances or Tribal/Indian Preference Policy) all have, by either law or practice, long defined what is a “Tribal Majority-owned” or “Indian Majority-owned company. One of the elements is that the Tribal Majority-owned company “must” reap the majority (51% +) of the benefits from the business endeavor with a non-Indian partner or investor. Otherwise, the company is not Tribal Majority-owned. Many of the business models used in the Tribal Lending Industry allow for as little as a1% Tribal share of the profits generated from the lending business. The Non-Indian partners are reaping hundreds of millions from what is supposed to be Tribally-owned businesses.

Generally, two other factors, dealing with majority control on the Board of Directors and control and exercise of day-to-day management authority also must demonstrate that such control and management is in the hands of the Indian side of the company. These elements are set out in the regulations under the Buy Indian Act but have been present for a century or so in Federal Indian Law and policy. These elements have also been common knowledge in the Federal Indian Law community for as long as we started calling it Federal Indian Law.

I don’t know if the feds will ever go after the Indian Law Attorneys who advised and helped set up the original business model, but at least one non-Indian attorney has been indicted for his part in what the U.S. Attorney alleged is a conspiracy to advance a fraudulent scheme under RICO. Indian Law Attorneys should take that as a warning to restructure the business model so the Tribe gets 51% of the profits and the investors and related companies take no more than 49%. What services that the TLE buys or pays for from companies performing various loan processing services, is the TLE’s business, but the Non-Indian partners should be shouldering at least 49% of the burden. Tribes, with a bigger share of the proceeds, could increase their local capabilities and provide some of the services themselves and create jobs in doing so. Tribal lenders also could create a “Tribal Lending Capital Pool” to finance the loans with 49% of the pool coming from Non-Indian partners.

Tribal Attorneys may want to assess whether their ethical duty is to advise their Tribal clients that the Tribal Government may have a “fiduciary duty” to try to recoup the difference represented by the small percentage they received, versus the 51% they were entitled to. Our Federal Trustee should be looking at whether the way the business model was set up constitutes “theft or conversion of Tribal money or assets, or conversion of a Tribal asset over to the use of a third party”. Also, maybe our Trustee has a “fiduciary duty” to recover for the Tribes 51% of the proceeds. Tribal lending is a legitimate area of commerce for Tribes. But, having someone take 90% or so for their own use, may be a crime. I would doubt that any Tribal Attorney would “knowingly” participate in a conspiracy to fraudulently set up a tribal business where the tribe is not reaping the majority benefit. But, you do have DOJ saying that an attorney who helped perpetrate (and conspired to) advance an enterprise profiting from a fraudulent (Rent-a-Tribe) scheme involving interstate commerce, is subject to criminal indictment.

Further, we now have at least one Federal District Court (Vermont) that has recently ruled, in a Class Action by loan recipients, that Tribal Sovereign Immunity is not a bar to jurisdiction over the officials and employees of a TLE conducting business “off the reservation through the Internet”, citing the relatively recent Supreme Court Bay Mills decision. That court denied the Tribal Officials and Employees’ motion to dismiss them as Defendants. The Vermont case also involves a “Private RICO Action”. (RICO is the Racketeer Influenced & Corrupt Organization Act). RICO has been used to prosecute organized crime by pulling everyone in the chain of activities that constitute the crime into the criminal prosecution.) The Tribal officials will now have to stay in the case and defend themselves right along with the non-Indian individuals and corporate defendants (former PayDay lenders or financiers and loan service companies). The Vermont Court did acknowledge that it may be rather difficult, because of Tribal Sovereign Immunity, for the Class Action Plaintiffs to ever recover monetary damages from the Tribal defendants, but certainly could have equitable remedies (such as an injunction) against the Tribal officials. You would think the Tribal defendants in the Vermont case would stipulate that they are not the “owners” and the real owners are the non-Indian Corporate and individual defendants insulating themselves from personal liability. That would alleviate the harm to all Tribes should the Federal 2nd Circuit Court ever uphold the District Court’s application of Bay Mills in saying that Sovereign Immunity did not bar the case against the Tribal Officials and Employees involved.

Until Bay Mills the Supreme Court has said that Tribal officials generally carry the Tribe’s sovereign immunity with them when conducting Tribal business, even off the reservation (Kiowa Principle). That rule may change after the Bay Mills decision, and the “discussion” in that opinion about “state alternative remedies or actions” against individual Tribal officials or managers running an off reservation Tribal business that may violate state law. The Court said remedies could include prosecution under state law, because when they leave the reservation Tribal individuals are under general state jurisdiction. That was not the central question in Bay Mills. The Supreme Court agreed that Sovereign Immunity protected “the Tribe” in its conduct of off reservation commerce, which was a win. Yes, Bay Mills was a win, but subsequent use of that opinion to justify hauling Tribal officials and employees into court for acts they committed in “conducting tribal commercial activity” outside the Reservation, could prove very harmful.

Several years ago in a meeting of NAFSA (Native American Financial Services Association) I had urged the Tribal Lenders and their attorneys to restructure the Tribal Lending Business Model so that the Tribes were truly getting 51% of the benefit of the proceeds from their lending businesses. I felt they were vulnerable to the allegations that were arising about “engaging in a rent-a-tribe” or “sovereignty rental” scheme. I also suggested that Tribes and their non-Indian partners/investors should create a loan servicing capital pool on some variation of the AMERIND Model certain Tribes use for loss prevention. However, the “smartest guys in the room” prevailed and I was more or less told to take a hike because I didn’t have a dog in the fight. I took the hike but have been watching as the legal attacks on the Tribal Lenders mount and most are based on the activities of the Non-Indian partners and not the Tribes. I’m not happy about being right in this case, because with other recent developments, it may be too late to fix the problem. Bay Mills has thrown a whole different issue into the mix. Maybe only Congress can fix it.

The Tribal Lending Industry is now weathering a “Perfect Storm” of Private Civil Litigation, CFPB enforcement actions and Criminal Indictments. The latter, being against the Non-Indian former PayDay lenders and their associated loan servicing and transaction service companies (and an attorney who helped set it up in one case). While none of the Criminal Indictments have included charges against the Tribes or their TLE (or TLE officials and employees), they are named as “participants” and/or unindicted co-conspirators in the Criminal Indictments because of their involvement in the alleged illegal schemes of the Non-Indians. None of the cases to date, civil or criminal, has alleged that it is illegal for Tribes to have PayDay lending businesses. Under a “Cabazon Analysis” Tribes can legally engage in an area of commerce not prohibited by state law but rather permitted and regulated by state law, and tribes may do so under their own law and regulations. Absent any Federal Law preclusion on the Tribal commercial activity, Tribal Lending is legal. But, the business must be truly majority owned by the Tribes.

Of course, as always, consult your own attorneys. This is just one persons “commentary” as to where the industry seems to be heading. The better part of discretion would militate towards “restructuring” the business model, if, it’s not too late. Bay Mills might be the spoiler. Perhaps Congress should be approached to pass legislation that will preserve this area of Commerce for the Tribes. I certainly don’t like the Indian Gaming Regulatory Act and its “shared sovereignty” over gaming with States, but perhaps therein lies a way to “fix” the issues before this area of Tribal Commerce implodes.

Harold Monteau is a Chippewa Cree Economic Development and Finance Consultant writing from New Mexico. He is the former Chairman of the NIGC and practiced Federal Indian Law for 25 years.

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