This is a continuation of the tribal lending discussion we had a few days ago. In the last post we talked about the fact that the lending business of the tribes is under assault in the federal courts. That's not the end of the story. Companies engaged in tribal lending have also had to deal with a number of state regulators, usually it's some type of financial bureau that acts as a watchdog for the citizens of that particular state.
States like Illinois, Colorado, Washington, Oregon, California, and especially New York have been coming after the tribal lenders with a variety of legal reminders, decrees, and statements warning their citizens against using financial products offered by the tribal lenders.
New York stands alone in their dedicated pursuit against all online lenders that offer short-term loans above the state's maximum legal interest rate which is 16% because they have a new office within the state government called the New York Department of Financial Services and its first ever superintendent is Benjamin Lawsky.
This state regulator is on the march against these online lenders, a total of 35 companies have been issued cease and desist letters since last year. About half of those firms were Native American lenders. The fact that Native American lending companies have their sovereign nation status doesn't deter the state of New York at all, they still see the situation as an entity violating the laws of NY.
Of course the tribal lenders ignored the cease and desist order, which was to be expected. But what caught the tribes off guard was the move that New York made that was more informal.
Due to the cease and desist order the state financial regulator wrote to over 100 large commercial banks that have well over 90% of all depositing and checking accounts in the country, and asked that they make an effort not to accommodate the tribal lenders use of something called the ACH banking system.
The ACH, or automated clearing house, is a very popular electronic banking platform that most everyone has used at some point. Once a company (like a tribal lender) get an authorization agreement from an end customer (who has a checking account with that bank) then that company may, at their discretion, submit to remove funds from a customer checking account.
The fund dollar amount doesn't have to technically be pre-approved, although it normally is, but the agreement is open-ended in that if the tribal lender determines that a customer owes an additional fee, or if a customer missed a scheduled payment, then the lender may use the open nature of the authorization agreement to reach into that checking account for whatever level of funds they determine to be the appropriate amount.
The financial regulator in New York essentially said to these 100 plus banks something like 'we have these financial companies that are claiming immunity to our laws yet they are making offers to citizens of this state who are not eligible to receive these offers because they violate the state law, specifically the cap on the 16% interest rate, so can you please assist us (the state) in curtailing the tribal lenders ability to use your ACH system, which is largely the method they are using to break New York law' and that request was followed up by a number of those banks.
Now to what degree and how many of the banks stopped allowing tribal loan transactions is impossible to know because there is no central data for all these financial institutions. But what we do know for sure is that some of the banks did slam the door shut on the tribes because many tribal lenders have been complaining and others have simply switched to debit card transactions (like Greenline Loans) instead of focusing on the ACH transaction which had been the core functionality of transfers (of the tribal lending business) since at least 2008.
Will the loss of the automated clearing house method of transferring customer funds slow the tribal lending industry? Yes, it already has to some extent. But will the loss cause the business to discontinue? Not at all. We see some tribal lenders using third party payment methods like Green Dot money transfer cards.
We also see money being wired through MoneyGram and Western Union. There is also the widely popular switch to debit card transactions which will probably become the new focal point of the industry. Even though losing the ACH didn't help the Native American lenders it certainly isn't going to stop them either.
New York and other states are going to continue to push to slow these loans down but they will have a tougher fight on their hands as they try to regulate debit card transactions which are more diffuse and more customer centric than the ACH method of payment. No doubt these financial and legal maneuvers will continue through 2014 and into the future.