Tribes Fail to Block N.Y. Internet-Loan Action

Two American Indian tribes that sued New York’s top financial regulator over a crackdown on high-interest online lending businesses, some of which are tribally owned, lost a bid to temporarily halt the agency’s actions.

The tribes’ claims that Benjamin Lawsky, superintendent of the New York Department of Financial Services, is regulating activity taking place on their lands in Oklahoma and Michigan are built on a “wobbly foundation,” U.S. District Judge Richard Sullivan ruled yesterday in Manhattan.

“The state’s action is directed at activity that takes place entirely off tribal land, involving New York residents who never leave New York state,” Sullivan said. The tribes “are not entitled to the extraordinary remedy of a preliminary injunction” blocking the regulator’s actions during the case.

The Otoe-Missouria Tribe of Indians, based in Red Rock, Oklahoma, and the Lac Vieux Desert Band of Lake Superior Chippewa Indians, based in Watersmeet, Michigan, sued Aug. 21 seeking to establish their right to market and sell short-term, high-interest loans to New York residents over the Internet. The regulator said the online businesses engage in predatory lending.

The injunction the tribes sought would have barred Lawsky “from interfering with plaintiffs’ lending activities,” according to the ruling.

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Lawsky on Aug. 6 had ordered 35 online lenders, including at least four tribal companies, to stop offering loans in New York. He also sent a letter to 117 banks -- including Citigroup Inc. (C), Bank of America Corp. and JPMorgan Chase & Co. (JPM) -- requesting their help to block improper lending by cutting off the lenders’ access to the electronic payments system they rely on.

Yesterday’s ruling acknowledged the case is a “potentially ruinous threat to the tribes’ financial stability,” said David Bernick, a lawyer representing the tribes. Customers who take out the loans do so after agreeing the transaction is being carried out under tribal law and not in New York, he said.

The decision “opens up a clear and painful breach in the law that historically has been there to protect the tribes -- particularly where they are trying to develop enterprises that will make themselves self-sufficient and economically stable,” Bernick said in a phone interview.

The case is Otoe-Missouria Tribe of Indians v. New York State Department of Financial Services, 13-5930, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Erik Larson in New York at elarson4@bloomberg.net

To contact the editor responsible for this story: Andrew Dunn at adunn8@bloomberg.net

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