This month, Scott Tucker, an online payday lender who used his billions in proceeds to fund his auto racing dreams, including buying a $1.3 million Ferrari and running a LeMans Series racing team, was sentenced to 16 years in jail on federal racketeering charges. Last fall, his former business partner Charles Hallinan, known as the Philadelphia Main Line “godfather” of payday lending, was also convicted of federal racketeering charges. Tucker and Hallinan’s main business model? Their claim that their payday loan enterprises were for the benefit of Native American tribal partners and therefore subject to tribal immunity from state or federal laws. In an authoritative new report (200 page pdf), a leading public interest law firm, Public Justice, now speculates: “Tribal Immunity” may no longer be a Get-Out-of-Jail Free Card for payday lenders.” It’s about time.
Along with others, we’ve been fighting payday lenders for decades. Their triple-digit predatory loans are debt traps, even where “legalized” by state action. Of course, when the lenders also claim to be above the law, the practices are even worse. One count in Scott Tucker’s conviction, for example, as pointed out by the USDOJ, is that the Tucker Companies violated the Truth In Lending Act by a practice of only paying off interest, but not principal, on a $500 loan, in a manner that resulted in the following fact pattern, where the loan was in fact, not paid off, but the total amount due actually tripled:
“Specifically, for a customer who borrowed $500, contrary to the TILA Box disclosure stating that the total payment by the borrower would be $650, in fact, and as Tucker […] well knew, the finance charge was $1,425, for a total payment of $1,925 by the borrower.”
You read that correctly. You borrowed $500 at (an already very, very high) cost of $30 per $100, expecting to pay $650 in a complete payoff of the loan, but ended up owing a total of $1,925. Meanwhile, in a letter to the judge seeking a lesser penalty before his sentencing this week, Tucker gave the following, tortured non-apology:
“Although I saw myself as being an entrepreneur, a jobs provider, and a contributor to the American economy, I’ve learned that others view me through a different lens. I am very sorry that our leaders castigate me as a villain, or some type of predator.”
You don’t have to make this stuff up, it writes itself.
Rent-a-tribe is merely the latest — but among the most sophisticated — in a long line of legerdemain to avoid state laws. Our joint 2001 report with the Consumer Federation of America, “Rent-A-Bank Payday Lending,” helped expose a previous payday lender scheme of using bank charter preemption of state interest rate laws to operate in the growing number of states that had explicitly banned payday lending by capping interest rates for small loans. Following a multi-year advocacy campaign, all federal banking regulators eventually banned “rent-a-bank” payday lending in the mid-2000s. The action shifted to “rent-a-tribe” gimmicks, which were successful for a while, but, as documented in that new report from Public Justice, relentless actions by a coalition of private attorneys, bi-partisan state attorneys general and federal agencies including the Department of Justice, Federal Trade Commission and Consumer Financial Protection Bureau have helped to slam the door on the “rent-a-tribe” scheme.
As Leslie Bailey, a co-author of the Public Justice report, explains in a detailed blog post summarizing the report:
“Payday lenders are nothing if not creative in their quest to operate outside the bounds of the law. As we’ve reported before, an increasing number of online payday lenders have recently sought affiliations with Native American tribes in an effort to take advantage of the tribes’ special legal status as sovereign nations. The reason is clear: genuine tribal businesses are entitled to “tribal immunity,” meaning they can’t be sued. If a payday lender can shield itself with tribal immunity, it can keep making loans with illegally-high interest rates without being held accountable for breaking state usury laws.”
Fortunately, the courts are now finding that these payday lender relationships with tribes are mere contrivances to avoid the law, not genuine tribal businesses. Tribes receive token payments; the vast bulk of the online businesses harm consumers off the reservation, particularly in those states that effectively ban triple-digit payday lending through 36% APR interest rate ceilings on small loans.
The convictions of Tucker and Hallinan and the now-growing body of law against the payday lender tribal schemes are not the end of the payday lending fight. In Congress, an effort to use the Congressional Review Act to repeal the Consumer Bureau’s short-term payday lending regulation is expected on the House floor soon (although it is largely premised on disingenuous arguments from its proponents). Further, with federal bank regulators under new management, the lenders are pushing to rescind previous prohibitions on “rent-a-bank” schemes.
And as Leslie Bailey concludes, the next strategem that payday lenders roll out may be to ride an idea from the federal Office of the Comptroller of the Currency to establish a loose, anything goes “Fintech” charter for non-banks.
Like sharks, payday lenders are always moving. Now that the tribal immunity scam’s days may be limited, we’re hearing rumblings about how online payday lenders might attempt take advantage of the OCC’s planned Fintech charter as a path to avoid being governed by state law, including state interest-rate caps and licensing and operating requirements.
We’re watching the development of the fintech charter and potential other threats to strict payday lending regulation, too, as are the 15 states and DC that make up “Payday Freelandia.” Learn more about the payday lending fight at StoptheDebtTrap.org. Stay tuned.
Senior Director, Federal Consumer Program, U.S. PIRG Education Fund
Ed oversees U.S. PIRG’s federal consumer program, helping to lead national efforts to improve consumer credit reporting laws, identity theft protections, product safety regulations and more. Ed is co-founder and continuing leader of the coalition, Americans For Financial Reform, which fought for the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, including as its centerpiece the Consumer Financial Protection Bureau. He was awarded the Consumer Federation of America's Esther Peterson Consumer Service Award in 2006, Privacy International's Brandeis Award in 2003, and numerous annual "Top Lobbyist" awards from The Hill and other outlets. Ed lives in Virginia, and on weekends he enjoys biking with friends on the many local bicycle trails.