Native American tribes are asking New York State’s top banking regulator to leave their payday loan businesses alone.
Regulator Ben Lawsky sent cease-and-desist letters last week to 35 lenders and 112 banks providing or facilitating short-term, high-interest payday loans to consumers online. The letters claim that the businesses charge interest rates far exceeding New York’s cap of 25 percent annually, putting them in violation of the law.
Although many of the companies are not incorporated in New York, Lawsky claims jurisdiction because some New Yorkers purchased the loans.
Many of the targeted lenders are run by Native American tribes, which do not fall under federal or state jurisdiction.
Lawsky is superintendent of New York’s newly-created Department of Financial Services, a powerful regulatory body whose supervisory reach extends far beyond the state. He is also the former chief of staff to New York Democratic Governor Andrew Cuomo, and is rumored to aspire to higher office himself.
Since assuming the position as the state’s chief financial policeman in May 2011, admirers and critics alike have pointed out Lawsky’s penchant for aggressively “collecting scalps” from high-profile financial corporations, an ironic turn of phrase given his recent focus on Native American bankers.
Representatives of the Native American Financial Services Association expressed outrage over Lawsky’s letter, which they believe violates the sovereignty of 16 Indian tribes based in the Midwest and western United States.
“The United States federal government views itself in a unique government-to-government relationship with Indian tribes,” said Barry Brandon, the executive director of NAFSA, in an interview with The Daily Caller News Foundation.
“[Court] cases have held many, many times that states do not have any jurisdiction over Indian tribes,” he said, pointing to numerous failed attempts by state governments to regulate Indian casinos. “How is it that the state of New York can tell these Indian tribes, who are operating lawful businesses created under tribal law, what to do?”
Brandon added that all Native American lenders under his organization operated according to federal law and adhered to a rigid set of best practices.
“We can’t help but think that an overzealous regulator is discriminating against tribes by targeting us,” he said. “Tribes have long suffered under the hands of both the federal and state governments, and state governments are very jealous of their jurisdiction. Tribes are used to having to fight against states.”
Financial experts also weighed in, saying that Lawsky’s demand for the lenders to shut down is unwarranted and would limit consumer options.
“New York consumers who take out these supposedly short-term loans quickly get caught in a vicious cycle of long-term debt,” the letter reads. “The loans become difficult if not impossible to pay off due to the triple- and quadruple-digit interest rates, together with overdraft fees.”
But John Berlau, a scholar from the free-market Competitive Enterprise Institute, says Lawsky’s claim is misleading.
“When you say [these loans have] 1,000 percent interest rate, that’s annual interest,” he told TheDCNF. “If a hotel room is $100 a day, you could say the annual rate for the hotel could be five figures.”
“Ironically, a payday loan can be of lower cost often than overdraft fees,” Berlau said. “When they eliminate these short-term, non-bank loans, the irony is they’re leaving consumers with marginal credit even more at the mercy of banks.”
Peter Barden, the communications director at the Online Lenders Alliance, explained why some people choose payday loans. “Credit options have been reduced significantly since the financial crisis,” he told TheDCNF. “People’s credit card limits are being reduced. Of course, the equity in their homes are wiped out, or if they still have any their home equity loans are being reduced… There has been a tremendous amount of credit that has been taken out of the economy.”
“Half of Americans in an emergency couldn’t put together $2,000 in a week,” he continued. “You can’t go to your bank and get a $2,000 loan. Most of our customers are looking for loans in the $500-$700 range, but there’s no place you can get them.”
Lawsky’s aggressive pursuit of financial institutions have startled banks and federal regulators alike. In August 2012 he targeted Standard Chartered, a British bank with extensive ties to New York City, for allegedly laundering money for Iran in violation of American sanctions.
The intensity of the investigation surprised even the Treasury Department, as did the steep $340 million settlement fee.
While Lawsky’s combative stance is praised by those who view him as a crusader against free-wheeling and manipulative financial institutions, critics argue that Lawsky unfairly attacks foreign institutions to protect New York City’s eminent place in global finance and claim his “scalp collection” is designed to burnish his reputation as he prepares to run for political office.
These allegations have prompted some to label him a “rogue regulator.”
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