Consultants4Tribes.com

Over the next two months, I will be posting the following items from a handbook I have written entitled, “Payday Lending – The Sovereign Model.” The handbook was written for those of you in the payday loan industry who are considering the Sovereign Model but may not be as familiar as you’d like with the model. Moreover, it was written from my perspective as a consultant to the payday loan industry to explain the tribal side of the partnership.

If who would prefer having the handbook sooner and in its entirety, you can download the handbook for $19.95 by clicking the BUY NOW button in the upper right-hand corner of this page.

Topics covered:

What is the Sovereign Model

What Is a Federally Recognized Tribe

What is Sovereign Immunity

What Is a Limited Waiver of Sovereign Immunity

Key Legal Authorities

How Do I Find a Federally Recognized Tribe

Advantages of the Sovereign Model

Sample Marketing & Servicing Agreement

Resources

Please be advised that the information presented in the handbook is solely for informative purposes and does not purport to be a complete description of the Sovereign Model. Before implementing any of the content contained in the handbook, you should perform your own due diligence including seeking the advice of an attorney.

The Federal Trade Commission on Monday sued a payday lending company with ties to Johnson County businessman and racecar driver Scott Tucker for allegedly imposing high fees and collecting on loans by threatening borrowers with arrest and lawsuits.

The agency said in a statement that it was seeking to halt the alleged illegal activities while it pursued its case. The FTC said that many of the borrowers were on American Indian reservations.

The FTC said it sued AMG Services Inc., three other Internet-based lending companies, seven related companies and six individuals with violating federal laws by deceiving consumers when providing and collecting on payday loans. One of the defendants who allegedly controlled the companies is Scott Tucker of Leawood, KS, a race car driver.

According to the FTC, Tucker and his brother Blaine Tucker, a co-defendant, transferred more than $40 million collected from payday-lending customers to another company Scott Tucker controls, Level 5 Motor Sports. The FTC called the money “sponsorship fees that benefit Scott Tucker’s automobile racing.”

The lawsuit was filed in U.S. District Court in Nevada.

This is the second time in seven months that the federal agency has taken action against a payday lender that used a tribal affiliation to defend itself against actions by state authorities. “Like other payday lenders,” the FTC said, “this operation has claimed in state legal proceedings that it is affiliated with Native American tribes and therefore immune from legal action.” However, the FTC said that claims of tribal affiliation “do not exempt them from complying with federal law.”

Colorado Case No. 05CV1143

Defendants: Cash Advance, a PDL owned by the Miami Tribe of OK

Preferred Cash Loans, a PDL owned by the Santee Sioux Nation of NE

On Monday, February 13, 2012, Judge Morris B Hoffman, District Court Judge for the Colorado Supreme Court, ruled: The State of Colorado did not meet its burden of proving that the tribal entities are not arms of their tribes. He concluded that the tribal entities are immune and quashed the administrative subpoenas issued by the State Attorney General’s office and discharged the contempt citation.

Judge Hoffman’s order contains an informative and thorough discussion of tribal immunity, their right to pursue economic development and commercial enterprise through an arm of the tribe and their right to contract with non-Indian operators for the business.

He further stated that the federally recognized tribes met the three-part arm-of-the-tribe test:

1.     The business entities were created pursuant to tribal law;

2.     The tribes owned and operated the entities; and

3.     The entities’ limited waiver of sovereign immunity protected the tribes’ sovereignty.

Judge Hoffman summed up his opinion as follows: What the State has fundamentally misunderstood in this case is that tribal entities are immune, not their particular businesses, and therefore that tribal immunity does not depend in any way on the type of business a tribal entity engages in, with whom or for whatever purpose.

The entire 27-page document is worth reading. Please contact me if you’d like the PDF emailed to you.

Very informative legal background specific to sovereignty and payday loan companies.
http://apps.americanbar.org/buslaw/committees/CL230000pub/newsletter/201112/sims_hosie.pdf

Here’s my take on the article:
• The online PDL business must be created pursuant to tribal law.
• The tribe must own – preferably 100% – and operate the entity. This does not preclude a
tribe contracting with a PDL to market and service its online business.
• The entity must conform to federal consumer financial law.

The last point is worth underscoring. If PDLs are seeking relationships with tribes and are intending to thwart federal law, they are inviting federal intervention. However, if the PDLs are seeking consistency unavailable in the 48-state model and have every intention of conforming to federal (not state) regulations, there should be no problem.

Also worth noting: The Justice Department released a ruling last month clarifying that the Wire Act’s ban on interstate transactions related to gambling applies only to sports betting, opening the door for states to offer online gaming to their citizens. The ruling was a reversal of DOJ’s previous position.

Once the “how-to” is worked out, this ruling may very well underscore a tribe’s right to operate an online business that traverses state lines.

new study worth reading: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1960776

This matter is currently before the courts in Colorado which you can find at http://www.iwatchnews.org/2011/12/20/7716/courts-debate-validity-indian-owned-payday-lenders.

While I will not comment on the specifics of this case, I can generically state that tribes more often than not prevail when it comes to attacks on sovereign immunity which has been bestowed upon federally recognized tribes by both Congress and the U.S. Supreme Court. Nonetheless, these early examples of “rent a tribe” relationships between tribes and PDLs, while legal from a sovereignty standpoint, have served as examples of what not to do.

My firm brokers business relationships between federally recognized tribes and PDLs. Today, these are the tenets that guide us:
• The online business must be 100% owned by the tribe.
• The tribe, in turn, contracts with a PDL to service, market and operate the tribe’s business. This is not unlike tribally-owned casinos which have contracted with experienced casino operators such as Harrah’s to manage the business on the tribe’s behalf.
• The PDL may also provide start-up working capital and loan the tribe funds from which the tribe makes its loans to individuals. These funds are repaid the PDL once the individual loan is repaid the tribe. Again, this is not unlike tribally-owned casinos which have been financed by outside interests, sometimes other tribes such as the Mohegan Sun. These outside interests are then repaid from future cash flows of the casinos.
• The contracts include consumer protection language, to wit: “In collecting payments owed under the notes, the Company shall comply in all material respects with applicable law, including without limitation the Fair Debt Collection Practices Act (the “FDCPA”) and applicable debt collection regulations and consumer protection laws applicable to the Company and the Best Practices of the Community Financial Services Association of America. The Company shall not encourage or allow its employees to threaten or imply that failure to honor any payment instrument in connection with any loan shall subject the borrower to potential criminal prosecution.”

At the current time, we have linked six(s) PDLs with three (3) federally recognized tribes using the tenets described above.

allen@consultants4tribes.com

In speaking with some payday lenders, two misconceptions were voiced which need to be addressed.

First, if a PDL affiliates with a tribe, the tribal members are the primary market. Like anyone else, tribal members can apply for a loan; but the marketplace is the Internet and wherever its tentacles reach. PDLs will market and service tribally-owned websites that cater to applicants from anywhere.

I would suggest, however, that PDLs in their proposals to tribes consider offering reduced interest rates to the tribes’ members.

Second, the tribe will eventually buy out the PDL. The marketing and servicing agreement that we use does not even address this as a possibility. However, if the PDL is a willing seller and the tribe is a willing buyer and terms can be agreed to, such an event can obviously occur. It’s simply not mandated.

We have exclusive representation agreements with six tribes in California and one in Michigan:
• All seven tribes are seeking payday loan partners.
• All seven tribes are federally recognized and thus have sovereign immunity from lawsuits.
• All seven tribes’ sovereign immunity extends to their tribal businesses. Therefore, if you
partner with a tribe, your business arrangement is also protected against lawsuits.
• All seven tribes will waive their sovereign immunity for their payday loan partner, which
means they can be sued in a state court for contract noncompliance.
• All seven tribes want your business to succeed and will partner with you for five or more
years.

If you are interested or need more information, call me at 951-260-8149; or email me at allen@consultants4tribes.com. Thank you.

The owner of California Parking Services had already pled guilty to bribing the tribal chairman of the Soboba Band of Luiseno Indians with $50,000 in order to secure a valet parking contract at the Soboba Casino in March 2007.

Now, the company has also lost its appeal in a civil case (California Parking Services Inc. v. Soboba Band of Luiseno Indians) that claimed the tribe backed out of the contract in June 2009, well before the company’s three-year contract was up.

California Parking Services had said it tried to compel arbitration in accordance with its agreement with the tribe after its contract was voided. The tribe said no, citing tribal sovereignty. The Riverside County Superior Court sided with the tribe. On July 20, so did the state Court of Appeal.

The contract California Parking Services had notably omitted rule 48(c) of the Commercial Arbitration Rules and Mediation Procedures of the American Arbitration Association. That rule would have given the state and federal courts the jurisdiction to award a judgment. Without it, the arbitration clause in the agreement was essentially pointless.

A reminder for businesses doing business with tribes, according to a quote from another case cited in the appellate decision: “As a matter of federal law, an Indian tribe is subject to suit only where Congress has authorized the suit or the tribe has waived its (sovereign]) immunity.”

There have been some cases where a tribe gave up that sovereign immunity in the language of its contracts, but that didn’t happen in this case, according to the decision.

“Whether the arbitration clause in (another case) incorporated the
entirety of the Arbitration Rules of the American Arbitration Association, the Soboba Band’s clause in its contract with CPS explicitly excluded … the rule granting federal or state court consent to enter judgment upon the arbitration award.”

The tribe’s chairman, Robert Salgado, in the meantime, has pled guilty to accepting $875,000 worth of bribes from California Parking Services and four other companies in exchange for contracts.

From the Wednesday, August 17, 2011 Business Section of The Press-Enterprise of the Inland Empire, California

As we are all aware, the Wall Street Journal did a story back in February on payday loan companies using a tribal relationship strategy to avoid payday loan state-by-state licensing. Attacks on these relationships by state attorney generals have resulted in the relationships being upheld as extensions of sovereign immunity.

The recent Dodd-Franks legislation targeted payday loans under its consumer protection provisions. While my understanding is that the new federal agency will respond on a complaint only basis rather than go after payday loan companies proactively, this becomes another reason for payday loan companies to pursue the sovereign model.

Why? Because the practices of payday loan companies without the protection of sovereign immunity are subject to state-by-state regulations, legal attack and now consumer protections pursuant to federal law.

Tribal joint ventures between payday loan companies and federally recognized tribes, however, extend the tribe’s sovereign immunity from legal recourse to the joint venture.

Moreover, new tribal lobbying groups such as the Native American Fair Commerce Coalition (www.savethetribe.org) have arisen to protect these joint ventures under the aegis of protecting sovereign immunity.