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Financial Services Law Insights and Observations

California Appellate Court Holds State Regulators Lack Authority To Regulate Tribe-Affiliated Lenders

Payday Lending Internet Lending

Consumer Finance

On January 21, the California Court of Appeal, Second District, held that short-term, small-dollar credit businesses owned by certain federally recognized Indian tribes are sufficiently related to their respective tribes to be protected under the doctrine of tribal immunity from state regulation. California v. Miami Nation Enterprises, No. B242644, 2014 WL 212220 (Cal. Ct. App. Jan. 21, 2014). The court affirmed a trial court’s dismissal of a civil action filed by the Commissioner of the California Department of Corporations seeking to enforce an order directing five tribe-affiliated lenders to cease providing payday loans over the Internet to California residents allegedly in violation of several provisions of the California Deferred Deposit Transaction Law. The two tribes had entered into management agreements with a non-tribal payday marketing company to direct and operate their lending activities. The court rejected the Commissioner’s argument that tribal immunity does not apply because under those agreements the day-to-day operations of the businesses have been effectively delegated to a nontribal entity, and that the tribes do not participate in the net income from the businesses, receiving instead only a “modest percentage” of the gross revenues. The court held that a business functions as an arm of the tribe if it (i) has been formed by tribal resolution and according to tribal law, for the purpose of tribal economic development and with the clearly expressed intent by the sovereign tribe to convey its immunity to that entity; and (ii) has a governing structure both appointed by and ultimately overseen by the tribe. The court added that “[n]either third-party management of day-to-day operations nor retention of only a minimal percentage of the profits from the enterprise (however that may be defined) justifies judicial negation of that inherent element of tribal sovereignty.”

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