Who’s Pay Day Loan Is It Anyway?

October 11, 2013 at 8:09 am Leave a comment

As readers of this blog and those credit unions unfortunate enough to get caught in the cross fire know, the state has taken aim against pay day lenders who provide loans to New Yorkers.  Specifically, in early August it sent out cease and desist letters to 32 Internet pay day lenders; criticized NACHA rules for not enabling institutions to do more to block the processing of pay day loans; and sent a letter to 117 institutions, including credit unions, strongly urging them to assist the state’s efforts in curtailing pay day lending activity.

Among the pay day lenders subject to the state’s wrath were Indian Tribes based in Michigan and Oklahoma.  These tribes have sued the state claiming that its activities interfere with their sovereignty.

Round One of what may end up being a very protracted legal dispute went to the state.  For those of you who like boxing, the fight is not over yet, but let’s say the Indian Tribes certainly received a standing eight count.  In The Otoe-Missouria Tribe of Indians, et al v. NYS Department of Financial Services, et al, the Tribes sought to get a preliminary injunction blocking the state from further interference with its payday lending activity.  As a general rule, preliminary injunctions are granted to parties who can show that they are likely to win in a lawsuit and are being harmed by the ongoing activity over which they are suing.  The issue comes down to whether or not Internet activity takes place on Indian land.  It is pretty well settled that activities taking place wholly on Indian reservations are exempt from state law unless Congress says otherwise.  The Indian tribes argued that they own and control the websites through which the payday loans are offered and that consumers are clearly informed that payday loans are subject to tribal law.

In its ruling, the Court said that none of this mattered since “consumers are not on a reservation when they apply for a loan, agree to the loan, spend loan proceeds, or repay those proceeds with interest.”  The Court concluded that consumers “have not in any legally meaningful sense travelled to tribal land.”  New York State can regulate this off-reservation activity.

The decision still leaves credit unions and other financial institutions whose members receive pay day loan proceeds via ACH transactions (so called “receiving depository financial institutions”) in a legal grey area.  Simply put, it is still not realistic to expect RDFIs to monitor where a specific electronic transaction originated and if it is legal in that given jurisdiction.  If any changes are to be made, the onus has to be placed on the institution originating the requested money transfer since that institution is in the best position to know if the activity being triggered is lawful.  However, the decision does strengthen the state’s hand as it seeks to clamp down on Internet payday lenders.

Perhaps the best thing about this weekend for Giants fans is that we aren’t obligated to sit through three hours of losing football on Sunday.  We already got that out of our system last night.  There’s always hockey season and basketball is right around the corner.  Your faithful blogger is taking some time off next week, but I should be back before week’s end.  In the meantime, let’s hope common sense prevails and that most politicians realize, like my four year old already does, that defaulting on debt payments is a BAD thing to do.

Entry filed under: Legal Watch, New York State. Tags: , , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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