Can online payday lenders shield their illegal behavior from state law enforcement by affiliating nominally with Indian tribes and then claiming sovereign immunity?
The Issue: A California court of appeal held that payday lenders accused of lending at illegal interest rates, illegally rolling over loans, and using threats and other illegal means to collect loan payments were not liable under California’s consumer protection laws because the lenders had affiliated with Indian tribes, and were therefore protected from state oversight by tribal sovereign immunity.
Why It Matters: The payday lending industry has employed unfair and deceptive practices to draw hundreds of thousands of California’s most vulnerable residents ever deeper into debts they cannot afford, often resulting in bankruptcy, delayed medical care, and other serious harms. California cannot protect consumers from these and other harms if rogue businesses can evade regulation simply by finding a tribe somewhere in the United States that is willing to agree to nominal affiliation in exchange for a small percentage of the profits.
Public Good’s Contribution: Public Good wrote a letter to the California Supreme Court urging them to grant review. The Supreme Court granted review a week after receiving Public Good’s letter. Public Good then filed an amicus brief in the Supreme Court arguing for overturning the Court of Appeal’s decision. The letter and the brief detailed the devastating impact of illegal payday lending practices on large numbers of California’s most vulnerable citizens, as well as the increasing prevalence of non-Indian payday businesses seeking to shield their illegal conduct through nominal affiliation with Indian tribes. Public Good reviewed the history of both the predatory tactics of the particular payday lending entities involved in the case and of other similarly dubious strategies employed over the years by payday lenders seeking to evade regulation. Public Good pointed out that the standard set out by the court of appeal for determining when a business is entitled to sovereign immunity was a standard that could be met by any business with a minimal pro forma affiliation with a tribe. We urged the Court to place the burden of establishing tribal affiliation on the entity claiming it, and to make the inquiry substantive rather than merely formalistic.
Amici joining Public Good: Public Good’s letter and brief were filed on behalf of itself and the Center for Responsible Lending, a leading public interest organization researching and combating predatory lending, as well as a number of other non-profit providers of legal services and advocacy. Community Legal Services in East Palo Alto, Housing and Economic Rights Advocates, the Law Foundation of Silicon Valley, and Legal Assistance to the Elderly, San Francisco, also joined the letter. The East Bay Community Law Center joined the brief.
Outcome: The California Supreme Court granted review on May 21, 2014, one week after Public Good’s letter was filed (and two and a half months after the State’s Petition for Review was filed). On December 22, 2016 the Supreme Court reversed, holding that the court of appeal had employed an incorrect standard, that the burden of proving tribal affiliation falls on the entity claiming affiliation, and that whether the link between a business and a tribe is close enough to merit sovereign immunity requires case-by-case scrutiny under a multi-part test that looks beyond mere form to the substance of the arrangement. Though careful to note that it was not basing its arm-of-the-tribe test on the egregious facts of the specific case before it (the principal operator of the payday lender has in the meantime been indicted elsewhere on criminal charges for his payday lending schemes), the Court did note those facts, and did (as Public Good had urged) significantly raise the bar for finding tribal immunity-by-affiliation.
223 Cal.App.4th 21 (Jan. 21, 2014), and judgment reversed, 2 Cal.5th 222 (Dec. 22, 2016).