About 24 Native American tribes offer online installment and payday loans, capitalizing on their sovereign rights to govern themselves in a highly regulated industry, like casino gambling. The tribes earn revenue from borrowers who are charged interest on high-rate loans that both help and harm consumers who temporarily need money but are left with unmanageable fees and debt, even if borrowers make payments on time.
Since the recession, the so-called payday loan industry has grown nearly 20 percent, with a significant portion originating online. According to a Federal Reserve report, about 4.2 percent of Americans took out a payday loan in 2013, compared with 2.4 percent in 2007. Several states have created laws to restrict or curb payday lending. In response, the industry has discovered Indian tribes where state laws do not apply.
For example, in the Upper Peninsula of Michigan, the 684-member Lac Vieux Desert Band of Lake Superior Chippewa Indians, backed by a Wall Street hedge fund, employs 11 workers and operates a call center in the Philippines to sell online loans to desperate borrowers at annualized interest rates of 780 percent. The operation began in 2011 and tribal officials said the business now accounts for about 42 percent of its annual budget. Tribal Chairman James Williams Jr. said it has helped prevent members from having to choose “between heat and food.” Previously the tribe’s small Lac Vieux Desert Casino had been its only significant source of revenue.
For years, bad luck seemed to follow the tribe. Its plan to attract a cigarette manufacturer collapsed. An internet bingo site had lasted two months. And the tribe had lost more than $6 million, nearly an entire year’s budget, in a bad investment with a Mexican casino czar. Unemployment stood at 50 percent. Officials heard about the lending business at a Native American conference. They consulted with lawyers and IT experts, contracted out most of the start-up work and raised investment capital from a “multibillion-dollar hedge fund,” said tribal lawyer Karrie Wichtman. The company, Duck Creek Tribal Financial LLC, kicked off on July 8, 2011 with the goal to “improve the tribe’s economic self-sufficiency.” Castle Payday is its payday lending enterprise.
The Castle Payday website touts the loans as “Life’s Unexpected Expenses Covered.” The loans “are structured as installments but have very devastating consequences for consumers. These are triple-digit interest rate loans made with access to borrowers’ bank accounts,” said Diane Standaert, director of state policy at the Center for Responsible Lending. Ironically, most Lac Vieux Desert Band members would not be approved, since fees are automatically deducted from borrowers’ bank accounts, and most Lac Vieux Desert Band members don’t use banks.
A $1,000 Castle Payday loan, repaid on the first payment date, comes with $350 in fees which grow quickly if borrowers wait longer to pay back the principal. On its website, Castle Payday shows if a borrower repays a $1,000 loan in 44 installments, spread over one and one-half years, the total fees will be $8,916.25.
Wichtman said the lending company “realizes that the loans it offers are sometimes an expensive form of borrowing,” and as a result takes “every opportunity” to tell customers that they can save money by paying early. She said about 20 percent of borrowers pay in full at the first opportunity, and others try to make their payments ahead of schedule. Very few borrowers, “certainly in the low single digits,” let their loans fully mature, Wichtman said.
She added attempts at regulation are considered unwanted interference by outsiders. “Anytime Indian country enters into something new, it’s a fight, because they think we should stay on the reservation,” Wichtman said. She noted Indian tribes faced similar resistance when they entered the gambling industry decades ago. Chairman Williams added the goal of regulation is to “keep us in poverty.”
