Native American tribes are constitutionally guaranteed the right to order their own affairs outside the sphere of federal law and explicit acts of Congress. They have consistently used this right to establish tribe-owned and operated businesses that spend the profits on health care, education, housing, and social services.
But certain tribes have recently seen the emergence of a new threat to their sovereign independence and tribal immunities from prosecution by the states. A recent administrative order by the state of Connecticut’s Department of Banking against the Otoe-Missouria tribe of Northern Oklahoma has led to an unprecedented civil rights lawsuit that may forever change the way Native American tribes and their business arms conduct online banking across state lines.
Here is how the administrative order and the lawsuit came about.
On January 6th, 2015, Howard Pitkin, the retiring Connecticut state Department of Banking commissioner, issued a cease and desist order against Great Plains Lending and Clear Creek Lending, the payday lending arms of the Otoe-Missouria tribe. Commissioner Pitkin ruled that CEO and tribal leader John Shotton was in violation of Connecticut banking statutes and fined Great Plains and Clear Creek in the amounts of $700,000 and $100,000, respectively, and took the unprecedented step of fining Shotton an additional $700,000. Pitkin determined that Great Plains and Clear Creek had violated Connecticut state law by lending at rates above 12 percent APR on small dollar loans of less than $15,000.
On March 9th, 2015, John Shotton, serving in the unified capacity as chairman of the tribal council and secretary and treasurer of Great Plains and Clear Creek, filed suit against Pitkin and acting Connecticut bank commissioner Bruce Adams in the U.S. federal court of the district of Western Oklahoma. The suit alleges that Pitkin and Adams acted “under color of state law, with the intent and for the purpose of depriving Plaintiff of rights secured under the Constitution and laws of the United States.”
Specifically, the suit alleges that Pitkin and Adams imposed the civil penalty of $700,000 without warning and without giving Chairman Shotton the opportunity to defend himself against the charge, thus denying him due process of law in his capacity as an individual and his right of immunity in his capacity as a tribal official.
Shotton’s legal complaint regarding the violation of his Constitutional rights rests on the grounds that Indian tribes possess inherent sovereignty. Based on Article I, Section VIII, and U.S. v. Kagama (1886), the complaint argues, “Tribal sovereignty, though inherent, is still subject to defeasance at the hands of Congress, as Congress exercises plenary power over Indian affairs.” It argues that “it is Congress alone that has the ability to diminish tribal sovereignty in any capacity. Unless authorized by Congress, state government agencies have no authority to invade the sovereignty of an Indian tribe by unilaterally imposing their laws upon the tribe.”
Using case law, the complaint argues that immunity from suit is a “core aspect” of tribal sovereignty and that this immunity extends to commercial activities and to the officers of the tribe.
In layman’s terms, the legal bone of contention is that commissioners Pitkin and Adams ruled that Great Plains and Clear Creek, under the leadership of tribal chairman Shotton, practiced usury and ordered them to cease operations in the nutmeg state. For his part, Shotton argues that he and his Otoe-Missouria lending businesses were in effect convicted without due process and are immune from anything resembling prosecution under Connecticut statute law because, “Congress has the ability to abrogate tribal sovereign immunity, but until Congress takes action to do so, that immunity remains intact.”
Shotton’s tribal sovereignty and due process argument is supported by the Native American Financial Services Association. Lance Gumbs, the executive director of NAFSA, provided the following quote for this story: “While many states have engaged in meaningful discussions as well as constructive government-to-government relationships with Native American tribes that are responsibly providing financial services to underserved consumers, Connecticut has instead chosen to ignore the sovereign rights of the Otoe-Missouria with its actions – as well as Chairman Shotton’s right to due process, a protection afforded to every American under the United States Constitution. Violations of the individual civil rights of any Native American and attacks on Native American sovereignty as a whole are always unacceptable. The Native American Financial Services Association (NAFSA) stands behind Chairman Shotton in his suit.”
This legal stalemate between tribal sovereignty and state regulatory authority is likely to reoccur in many states over the next few years. In 2013, the Otoe-Missouria and the Lac Vieux tribe of Northern Michigan were among 35 lenders and 112 banks that were ordered by New York state bank regulator Ben Lawsky to cease and desist from issuing payday loans in the state of New York because they exceeded the cap of 25 percent APR. The two tribes sued Lawsky in 2013 on the grounds that his action violated tribal sovereignty, but their case was rejected at the district level and their appeal was dismissed by a three judge panel in the U.S. federal court of appeals in New York.
“The court, noting it was sensitive to the tribes’ argument that lending profits fuel their growth, said the plaintiffs failed to establish that lending occurred ‘somewhere other than in New York’ or ‘on reservations,’” reported Patricia Hurtado of Bloomberg Business.
It is not likely that the federal bureaucracy will wait for Congress to take legislative action regarding the Indian tribes’ online lending enterprises. In early 2015, Great Plains and Clear Creek had their payment processing services shut down by two banks — U.S. Bank and Missouri Bank and Trust. Chairman Shotton stated that these actions were taken as part of the Operation Choke Point program, a shadowy multiple-federal agency effort, involving the Department of Justice, the Consumer Financial Protection Bureau, and the FDIC, to pressure banks and third party payment processors to discontinue service to entire categories of legitimate businesses that the FDIC deems “high-risk,” such as online arms and ammunition retailers, tobacconists, and payday lenders.
As the Daily Signal has detailed, most businesses that are victims of Operation Choke Point have not been indicted, let alone convicted, of any fraud. The timing of the Otoe-Missouria’s loss of their banking services and the civil fine by Pitkin suggests collusion between federal and state regulators.
The Otoe-Missouria may have felt some hopeful when, under pressure from Congress, the FDIC issued a memorandum on January 28, 2015 to put all recommendations for terminating deposit accounts in writing and not to make “reputational risk” the sole criterion for recommending termination of banking or third-party processing services to a business. This was a reasonable first step for the FDIC, but the CFPB — which receives its funding from the Federal Reserve and is beyond the reach of Congress’ power of the purse — has yet to issue its new rules regarding payday lending, and the lawyers at the Justice Department still retain their subpoena power under Operation Choke Point.
Unless or until Congress fulfills its trust responsibility to the Indian tribes by taking legislative action to regulate the payday lending of Indian tribes, the fate of the Otoe-Missouria’s online lending businesses will remain in the hands of unelected judges and unaccountable bureaucrats at both the state and federal levels. For the Otoe-Missouria and other tribes, the CFPB’s long-delayed threat of a regulatory crackdown of the payday lending industry could mean more than the loss of basic necessities and vital social services.
The loss of tribal sovereignty to the federal and state regulatory behemoth on the issue of online payday lending may be only the opening salvo in a 21st century bureaucratic version of the war on the American Indians.
Jonathan M. Hanen is a freelance writer and political consultant based in Washington, D.C.