The New York Department of Financial Services (DFS) may take direct and indirect actions against online tribal lenders, Judge Richard Sullivan of the Southern District of New York held in a ruling last week. The decision is the latest victory for the State of New York in its concerted crackdown on the online payday lending industry.

Benjamin Lawsky, the DFS superintendent, announced on August 5 that his agency sent letters to 35 online lenders, including tribal lenders, “directing them to cease and desist offering to lend and lending monies at usurious rates in New York.” Lawsky accused the online lenders of circumventing New York usury laws and “preying on vulnerable New Yorkers.”

The Otoe Missouria Tribe of Indians, based in Red Rock, Oklahoma, and the Lac Vieux Desert Band of Lake Superior Chippewa Indians, located in Watersmeet, Michigan, promptly filed a lawsuit to enjoin the DFS from purporting to regulate their lending operations. The tribes claimed that the DFS action infringed on their constitutional rights as sovereign nations, and emphasized that their business was located and conducted on Indian reservations.

Judge Sullivan acknowledged that a ruling against the lenders could "pose a potentially ruinous threat to the Tribes' financial viability." In ruling in favor of the DFS, however, he reasoned that “the state’s action is directed at activity that takes place entirely off tribal land, involving New York residents who never leave New York State. These 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.” According to Judge Sullivan, the borrowers “have not, in any legally meaningful sense, traveled to tribal lands.” The tribes have indicated they would appeal the order.

Judge Sullivan’s ruling, issued on October 1, came one day after New York Attorney General Eric Schneiderman announced a settlement with five New York-based debt collectors that collect payday loans. The companies agreed to pay $279,606 in restitution of amounts collected on payday loans made to New York consumers, to pay $29,606 in civil penalties, and to forgo collecting principal and interest on approximately $3.2 million in online payday loans. Additionally, one company will reverse 8,550 negative reports it made to credit reporting bureaus.

In a press release, Mr. Schneiderman heralded the agreements as “one more step in our continuing fight to protect New Yorkers from a range of unfair financial schemes – from predatory loans to illegal foreclosures and other abuses by big financial institutions” and warned that “my office will continue to crack down on an industry that exploits desperate consumers across our state.”

Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs).  Our attorneys, including the attorneys who joined us from the New York City litigation firm Stillman & Friedman, P.C., to form Ballard Spahr Stillman & Friedman LLP, have substantial experience in handling litigation with DFS and the New York Attorney General.

For more information, please contact CFS Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com, CFS Practice Leader Jeremy T. Rosenblum at 215.864.8505 or rosenblum@ballardspahr.com, Justin Angelo at 212.223.0200 x8012 or angeloj@ballardspahr.com, Brian D. Coad at 212.223.0200 x8034 or coadb@bssfny.com, Scott M. Himes at 212.223.0200 x8047 or himess@bssfny.com, James A. Mitchell at 212.223.0200 x8006 or mitchellj@bssfny.com, or Marjorie J. Peerce at 212.223.0200 x8039 or peercem@bssfny.com.


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