Court Rules NY Can Regulate Internet Payday Lending

October 3, 2014 at 8:21 am Leave a comment

The Court of Appeals for the Second Circuit held yesterday that New York’s Department of Financial Services has the authority to regulate Internet payday lenders based on Indian Reservations.  The decision is a major victory for the Department and its logic paves the way for the further regulation of out-of-state payday lenders that use the Internet to facilitate their loans.

In 2013, DFS ordered payday lending operations, most of which were based on Indian Reservations, to stop making payday loans in New York State.  Since New York State caps interest rates at 16% for unlicensed lenders, it effectively bans payday loans.  In addition to ordering these businesses to stop making loans that exceeded New York’s usury cap, the State strongly urged lenders, including several credit unions, to stop facilitating ACH payments to the payday loan providers.

Faced with a dramatic decline in their business, two tribes sued New York State in federal court, seeking to prevent it from blocking their Internet payday lending activities,  They argued that under the federal Constitution’s Indian Commerce Clause, the State had no authority to regulate lending activity taking place on New York State Indian Reservations.  They argued that the loans in question were processed through websites owned and controlled by Indian tribes, that the loans were granted based on underwriting criteria developed by the tribes, and that the lending contracts specified that tribal law would control any disputes.  In addition, they complained that by sending letters to banks and credit unions urging them to stop working with Indian lenders, the State was singling out Indian tribes for retribution.

A district court rejected the argument of the tribes and refused to grant an injunction against the DFS.  Yesterday’s decision by the Court of Appeals for the Second Circuit upheld that decision.  Most importantly, the Court agreed that the tribes had not presented sufficient evidence that the loans in question were, in fact, loans made on the Reservations.  It concluded that even though the tribes argued that the loans were “processed through websites owned and controlled by the tribes” they “never identified the citizenship of the personnel who managed the websites, where they worked, or where the servers hosting the websites were located.  Loans were approved by a tribal loan underwriting system, a vague description that could refer to the efforts of Native American actuaries working on the Reservation but could also refer to a myriad of other systems” located anywhere in the world.

Jurisdiction over Internet-based lending has implications that go far beyond questions of tribal law.  For instance, the rationale articulated by the Court yesterday strengthens New York’s ability to block Internet loans offered by banks located in states that authorize payday lending.  However, the decision is by no means a total victory for the State and underscores just how unsettled this area of the law is.  For instance, the Court stressed that even though it would not impose an injunction against the DFS at this time, the tribes could ultimately win their lawsuit if they provide additional evidence demonstrating that most of the lending activity took place on tribal lands.  Such a claim could take years to prove, and in the meantime the tribal business model is frozen.

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JP Morgan had personal information of 76 million customers stolen off its website this summer.  The announcement is the latest example of hackers targeting bank websites and online services not simply to gain access to member funds but to gain access to information such as names, addresses and phone numbers that can be used to facilitate other data breaches in the future.

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I know you all are dying to get this information:  my bet the mortgage World Series Champion prediction is that the California Angels will defeat the St Louis Cardinals in six games.  Just how trustworthy are my predictions?  NCUA is considering making them acceptable investments when it comes out with its updated Risk-Based Capital proposal.

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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