Payday loans, like loans secured by auto titles, have the highest interest rate charges around. Only people needing money to pay for essentials such as rent and utility bills take out such loans. Many states have banned them.
To get around the ban, payday loan companies have taken to the Internet to push their high-interest loans. The federal government is trying to stop them from using it.
The lenders are now encouraging Indian tribes to go into the payday loan business. Tribes have what is called “sovereign immunity.” This means states cannot regulate them and the federal government can only try.
The big banks, such as the Bank of America, are part of the payday loan system. Money from payday lenders is deposited in borrowers checking accounts. Then the banks charge them for late fees, overdrafts and even using their bank cards.
It is sometimes hard for borrowers to close their accounts and pay off their debts. Under pressure, some banks are starting to get out of the business.
Some tribes are starting their own payday loans businesses. Some are working with existing payday loan companies. According to a consumer advocate, “This is a new way for the [payday] loan industry to get out from under state laws.”
Tribal lenders and other payday lenders charge interest rates as high as 600 percent annually.
There are now are 16 tribes in the business, with a new one coming in nearly every month. A spokesman for tribes said, “Tribal lending is a financial lifeline for many tribes.” He said payday loans may be the best way of bringing in much-needed revenue.
Are the tribes are acting on their own or as fronts for lending companies? A spokesman said tribes may work with outside groups just as some Indian casinos use outside managers.
So far, the courts say tribes are immune from many state and local laws. Frustrated federal officials are promising to find ways to regulate tribal payday lending.