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District Court approves $500 million tribal lending settlement

Courts Tribal Lending Usury Settlement Online Lending Consumer Finance Interest Rate Appellate Fourth Circuit

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On May 12, the U.S. District Court for the Eastern District of Virginia preliminarily approved a nearly $500 million class action settlement resolving allegations that tribal online lending companies charged usurious interest rates. Plaintiffs’ filings outline their class action against tribal entities, as well as several of the entities’ non-tribal business partners (individual defendants), for making and collecting on high-interest loans.

The U.S. Court of Appeals for the Fourth Circuit previously upheld a district court’s denial of defendants’ bid to dismiss or compel arbitration in the case (covered by InfoBytes here). The 4th Circuit concluded that the arbitration clauses in the loan agreements impermissibly forced borrowers to waive their federal substantive rights under federal consumer protection laws, and contained an unenforceable tribal choice-of-law provision because Virginia law caps general interest rates at 12 percent. As such, the appellate court stated that the entire arbitration provision was unenforceable. “The [t]ribal [l]enders drafted an invalid contract that strips borrowers of their substantive federal statutory rights,” the appellate court wrote. “[W]e cannot save that contract by revising it on appeal.”

The 4th Circuit also declined to extend tribal sovereign immunity to the tribal officials, determining that while “the tribe itself retains sovereign immunity, it cannot shroud its officials with immunity in federal court when those officials violate applicable state law.” The appellate court further noted that the “Supreme Court has explicitly blessed suits against tribal officials to enjoin violations of federal and state law.”

Following more than three years of litigation, the parties eventually reached a settlement that will include tribal officials canceling approximately $450 million in debt. As part of the settlement, the tribal officials will eliminate the balance on any outstanding loans on the basis that the debts are disputed, cease all collection activity, and will not sell, transfer, or assign any outstanding loans for collection. Tribal officials will also request deletion of any negative tradelines for loans in the name of tribal officials or tribal corporations, and will pay an additional $1 million to cover the costs of notice and administration for the settlement and $75,000 to go towards service awards. Additionally, the individual defendants will create a $39 million common fund that will go to class members who repaid unlawful amounts on their loans. Class counsel is also seeking attorneys’ fees and costs totaling around $13 million.

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