It’s a few days after Christmas, and if you overextended yourself in buying gifts for your family and friends, you may be thinking about options to tide you over until the next payday. For years, payday lenders have offered short term loans at extortionate interest rates to people desperate for cash. Some loans are tied to collateral: the title to an automobile or deed to a house. Others offer unsecured “cash advances”, usually requiring evidence that a borrower is employed and that paychecks are deposited into an individual’s bank account. Borrowers secure the loans with a check to the lender dated in the future, or by giving the lender permission to debit from their checking accounts.
Payday loans charge extremely high interest rates, as high as 400-800% annually. The theory behind these rates is that they’ll be paid back in a few weeks, so finance charges aren’t competitive with more conventional bank loans. But payday lenders allow borrowers to “roll over” loans, using a new loan to repay a previous loan – a paper on payday lending coauthored by Harvard professor Elizabeth Warren explains that as much of 90% of the profits in the payday lending industry comes from loans rolled over 5 or more times. When these loans extend for months or longer, their interest rates mean that the cost of borrowing rapidly exceeds the initial sum borrowed.
In a few American states, these high interest rates violate usury laws, and payday lending is prohibited. The Pentagon, worried about the impact payday lenders were having on military families, asked Congress to prohibit this form of exploitative lending to military personel. The Talent Amendment, passed in 2007, helps protect servicemen and women… but civilians are still fair game. And while the newly created Consumer Financial Protection Bureau was intended in part to help regulate payday lending, lobbying from payday lenders has helped keep the business from being one of CFPB’s early priorities. (Law professor Nathalie Martin makes a compelling case that payday lending should be an early priority for CFPB. But CFPB’s website makes no mention of payday or title lenders.)
Home for the holidays, I’ve been catching up on Top Chef reruns on Bravo. Watching late night satellite TV exposes one to some unusual ads. I saw an extraordinary ad last night: A handsome Native American man in a suit tells me that, if I need money transferred to my bank account right now, Western Sky Financial may be able to help me. His name is Thomas Morgan, and he warns, “Yes, the money’s expensive, but there’s no collateral required, and you can keep the cost down by paying it as fast as you can.”
He’s not kidding about the money being expensive. If I borrow $1500 from Western Sky, $500 is immediately reclaimed by the company as a loan fee. I pay 234% interest on the loan, payable in 24 payments of almost $200 each. In exchange for $1000, I pay $4,756.56 over the next two years. Larger loans offer lower loan fees and interest rates, but the interest rates start to create truly surreal situations. Borrow $5,075 and the 84 scheduled payments add up to $40,872.72.
It’s not a coincidence that Western Sky’s spokesman is Native American. The commercial and website both emphasize that the business is
“owned wholly by an individual Tribal Member of the Cheyenne River Sioux Tribe and is not owned or operated by the Cheyenne River Sioux Tribe or any of its political subdivisions. WESTERN SKY FINANCIAL is a Native American business operating within the exterior boundaries of the Cheyenne River Sioux Reservation, a sovereign nation located within the United States of America.”
That’s a fascinating legal construction. It’s important for Western Sky to assert its status as a Native American-owned business so it can assert the Cheyenne River Sioux Tribal Court as the legal jurisdiction for the loan. And Western Sky’s default loan agreement forces borrowers to waive their rights to a jury trial, and to seek arbitration within the Cheyenne River Sioux Tribal Nation’s jurisdiction. Borrowers also waive the ability to participate in a class action lawsuit, and certain rights of discovery in the case of a lawsuit. It’s possible to opt out of this clause, but only through a convoluted procedure involving a written request.
(I don’t have a good answer to why the legal verbiage makes it clear that it’s an individual, not a tribal business – my guess is that if high-rate lending were an official tribal business, it might come under the purview of a federal regulator… but I’d be grateful for anyone’s insights on why Western Sky insists that this is an individual tribal member’s business.)
In the case of Western Sky, the lender is Martin Webb, who is a member of the South Dakota-based Cheyenne River Sioux tribe. Courts in West Virginia have determined that Webb’s legal status doesn’t protect his business from state and federal regulation, at least as regards loans to West Virginia consumers. (Western Sky’s website won’t let you apply for a loan if you are from West Virginia. The company faces similar bans in Maryland, California and, ironically, South Dakota.) And the Federal Trade Commission, while not ruling on whether Western Sky is based in Cheyenne River Sioux territory or South Dakota, has ordered Webb to stop collecting on debts by attempting to illegally garnish customers’ wages.
Perhaps it’s only fitting that Native Americans – cheated out of their lands by unfair treaties, politically and economically isolated since the foundation of the United States – are seeking economic development by preying on America’s least fortunate. Businesses run using sovereignty include casinos, discount cigarette sales and payday lending, all businesses that target vulnerable populations in the US. That’s the case, eloquently made, by Thomas E. Gamble, chief of the Miami Tribe of Oklahoma, which is involved in several lending businesses. In response to a request for information from reporters from the Center for Public Integrity, Gamble argues that tribes exiled to remote and desolate areas have had to find creative ways to develop “a diverse economy that can provide jobs, housing, education, infrastructure, health care and other vital services for our members.” How many of the 3,500 members of the Miami Tribe of Oklahoma are profiting from their lending business is unclear, but Gamble argues that by permitting lenders to operate within tribal lands, “is no different that South Dakota passing favorable laws in order to attract Citigroup and the like to set up niche industries within its jurisdiction.”
(Here, Gamble is referring to the exodus of banks like Citibank to South Dakota in the late 1970s. Under heavy lobbying from banks, South Dakota overturned its usury laws, allowing banks to issue credit cards with high interest rates. A Supreme Court decision in 1978, Marquette National Bank v. First of Omaha Service Corp., allowed banks to “export” the interest rates of the states they were based in to states where they had customers. States responded with “parity laws”, allowing locally chartered banks to offer competitive rates… so their banks didn’t all decamp to South Dakota. Gamble is correct that South Dakota made these changes to attract business and that these changes were legal. But he’s also making the case that his tribe should be allowed to engage in the sorts of practices that have created financial crises for millions of Americans, faced with punitive interest rates and fees from their credit card issuers.)
I’d find Gamble’s argument slightly more compelling if it were clear that his tribal members were the main beneficiaries of usurious loans. Generally, they’re not. Payday lenders are remarkably creative in finding loopholes in state laws that prohibit usury, and one of the most recently exploited loopholes is “rent a tribe“. Lenders based outside of Native American lands strike agreements with tribal members to “rent” their sovereignty in exchange for a small share of proceeds. A suit from the Colorado Attorney General uses financial documents to demonstrate that the tribes are generally making about 1% of proceeds from the lending business in exchange for “owning” the companies. The rest of the proceeds go to the lenders, whose offices are generally far from tribal lands.
Those proceeds go to guys like Scott Tucker.
Scott Tucker, race car driver, entrepreneur, apparent scumbag.
Chief Gamble’s letter in defense of Native American lending refers to AMG Services, a “tribal business” that manages several payday lending operations. Center for Public Integrity and CBS argue that AMG Services is actually run by Scott Tucker, the alleged gentleman pictured above. Gamble states that Tucker is an “employee” of AMG Services, and Tucker refuses to speak about his relationship to the Miami Tribe, citing a confidentiality agreement. CPI’s investigation discovered that Tucker and his brother were the only parties authorized to write checks on behalf of AMG, suggesting that the Miami tribe’s “ownership” of the company is nominal at best.
The CPI investigation finds that Tucker is one of the pioneers in using “rent a tribe” to protect otherwise prohibited payday lending businesses. Tucker is a convicted felon, who served time in Leavenworth in the early 1990s for mail fraud associated with a bogus loan scheme. After his release, Tucker turned to payday lending, managing a set of shell companies from an office in Overland Park, Kansas. When regulators in Colorado began investigating a Tucker-owned lender, Cash Advance, they faced an interesting challenge: the Miami Tribe of Oklahoma and the Santee Sioux Tribe announced that they owned the lenders, arguing that this put the business’s operations outside of Colorado’s subpoena powers. A Colorado court responded by citing Tucker for civil contempt.
Oddly, the citation for civil contempt hasn’t cramped Tucker’s style. He maintains an $8 million home in Aspen in his wife’s name, though AMG Services (the “tribal business”) pays the property taxes. And he likes to drive fast cars. When Tucker was recently ticketed for speeding in Olathe, Kansas, AMG donated $1000 to the campaign of the Kansas district attorney whose office processes tickets. In an odd coincidence, Tucker’s ticket was turned into a parking offense, leaving his driving record clean.
It’s important that Tucker’s driving record stay clean because driving is his passion and pastime. A breathless 2010 Wall Street Journal article celebrates Tucker’s participation in the 24 Hours of Le Mans, a massively popular auto race described as “the Super Bowl of international sports car racing”. The Journal – which has never met a bank it doesn’t like – describes Tucker as “a wealthy private investor from Leawood, Kansas” and marvels at the fact that Tucker apparently has “world-class talent” at motorsports. Nowhere does the WSJ article mention Tucker’s felonious past, or suggest that his driving skills may have developed as an attempt to outrun bank regulators.
A recent article on Tucker’s Level 5 Motorsports notes that Microsoft Office has recently signed on as the company’s chief sponsor. I guess Microsoft looks more sightly on a racing jumpsuit than the logos of payday lending firms. And I wonder whether Microsoft’s marketing department knows they’re supporting the hobby of a man whose money is made by bankrupting vulnerable borrowers.
I started writing this post because I saw Western Sky’s ad and immediately concluded, “That’s got to be illegal.” What’s remarkable, of course, is that it’s not necessarily illegal. Four of 50 American states have taken action against Western Sky, and at least one (Colorado) have attempted to cripple or shut down Tucker’s businesses. But it’s going to take a long time for 50 states attorneys general to bring proceedings against these semi-virtual lenders. And it wouldn’t be surprising to see lenders attempting to service this market across international borders.
One of the most interesting businesses in this space is Wonga.com, an English company that offers short-term loans online, much like Western Sky does. Like Western Sky, Wonga charges very high interest rates – their website advertises a 4214% annual percentage rate. Unlike Western Sky, Wonga claims to be a responsible lender, and does not seek to extend loans beyond their initial term (which, remember, is where payday lenders generally make their profits.) They give money to Kiva.org, and have taken investment from responsible venture capital firms and from one of the UK’s leading charities. They appear to be expanding and now operate in South Africa. It’s hard for me to know whether Wonga competing in the US against Western Sky and others would be a good or bad thing.
When I tweeted about Western Sky last night, a couple of people responded by arguing that if payday lending is too closely regulated, it will simply send the business underground. The opposite seems to be happening at present. Payday lenders have traditionally targeted the poor, and neighborhoods in the US where poverty is endemic tend to feature check cashing, auto title and payday loan businesses. (Nathalie Martin’s article notes that in states where payday lending is legal, there are more payday lenders than Starbucks franchises.) Businesses like Wonga claim to be targeting a wealthier set of customers who see high-cost loans as a convenience. (Why Wonga loans would be more convenient than a cash advance on a credit card, which though expensive, tend to cost less than these loans, is unclear to me.) Perhaps “overregulation” would mean a rebirth of illegal loan sharking – in the meantime, the appearance of TV ads for high-interest loans suggests that legalized loan sharking may be becoming more socially acceptable.
If you’re considering a payday loan or an online, high-interest loan, please read this article first. It’s from the Center for Responsible Lending, and offers a number of less expensive alternatives, including cash advances from employers, cash advances on credit cards, consumer loans from credit unions, payment plans from creditors and military loans.
Kudos to Center for Public Integrity and CBS News, and specifically to David Heath, Laura Strickler and Armen Keteyian for their stories on payday lending and the Native American connection. I cited these four stories (1, 2, 3, 4) in this post. It’s a reminder of the importance of investigative journalism in exposing complex stories like this one.