There’s been a dust-up in Connecticut recently over the state’s attempt to forestall a Native American tribe’s right to conduct business with residents. One important issue at play is Connecticut blatantly inserting itself into an issue over which it has no jurisdiction. There is a larger issue, however, and that is how the state’s antiquated usury laws harm consumers by stripping away their access to credit.
The Otoe-Missouria Tribe operates two consumer lending businesses, Great Plains Lending and Clear Creek Lending, from its sovereign land in Oklahoma. These firms provide short-term consumer loans to residents of Connecticut, at rates that are standard for such transactions and reflect the risks involved in making unsecured short-term loans, but which exceed the state’s usury rate of 12%.
Only credit unions, pawnbrokers, and banks can exceed that rate. So it seems odd that while one can pawn their gold watch at a rate exceeding 12%, just getting a straight cash loan from a lender – possibly the same lender who makes a pawn deal – isn’t permitted.
Connecticut has decided that it simply doesn’t like this form of consumer lending. Yet, rather than work with Indian Country to craft legislation that provides a usury exemption for this form of specialty lending, and provide consumers with access to credit that is permitted in more than thirty other states, it sought to sanction the tribe for asserting its sovereign rights.
However, Connecticut realized it would have a very hard time doing so through the courts. While payday lending is technically illegal in Connecticut, Federally-recognized Native American tribes and their elected representatives are immune from Connecticut process and suit.
“The tribe is a co-sovereign with the State of Connecticut and has tribal immunity,” according to Hilary B. Miller, a Greenwich-based and nationally-recognized consumer lending and tribal law attorney.
“This is an extremely well-settled area of law and was addressed recently in the context of payday lending in Colorado and California. Both courts held, on the basis of implacable authority, that the regulators in those states could not even take discovery of the tribes to ascertain the bona fides of their lending operations.”
With the judicial route eliminated, regulators instead issued an enforcement action against the elected Tribal Chairman, John Shotton, personally. The Banking Commissioner unilaterally, without any form of due process or oversight, levied a $700,000 fine against Mr. Shotton.
Yet this approach has no legal merit either, according to Mr. Miller. “Per the Colorado and California decisions, at a fundamental level, state administrative actions are unenforceable against the respondents.”
In an article for HartfordBusiness.com, UConn law professor Bethany Berger said "The Connecticut ruling seemed to hold that because this is an administrative rather than a judicial proceeding the tribe lacks sovereign immunity. I don't think that distinction holds up. Any governmental proceeding in which a state is telling an arm-of-the-tribe that it has to pay damages for its actions implicates sovereign immunity. The state just doesn't have jurisdiction to do it."
Even worse, however, Mr. Miller is troubled by the denial of due process, which was formally alleged in a civil rights lawsuit by Mr. Shotton.
“He does not personally conduct or transact any business in Connecticut, nor does he have any offices or agents in Connecticut; and there is no legitimate theory under which he is personally liable for the tribe’s activities. So hauling him into even an administrative forum without these so-called “minimum contacts” with Connecticut is inherently unfair.”
Indeed, Gov. Dannel Malloy thinks he can regulate in any way he desires when it comes to consumer lending, claiming, “We wouldn’t allow the Swiss to do it, we wouldn’t allow the French to do it, we wouldn’t allow the Germans to do it.” Someone forgot to tell Malloy that, actually, he has no such regulatory authority. An administrative action against Mr. Shotton has the same force of law as an action against German Chancellor Angela Merkel.
None of this drama would even be necessary had Connecticut the common sense to let consumers make their own choices regarding credit. There is a need for short-term, small-dollar credit in this country. Consumers have limited options, even in the most permissive states. Essentially, those options boil down to pawnbrokers, auto title loans, payday loans, longer-term installment loans, or bouncing checks.
Payday lending was born in the 1990s as a credit innovation. Writing a bad check, with the hope that a vendor wouldn’t cash it until the consumer deposited their next paycheck, was how most people generated that credit. Yet every bounced check cost $25-30 in both merchant and bank fees, costing the consumer as much as $60 for each and every check, no matter the amount.
Payday lending permitted the consumer to draw down a loan of a few hundred dollars and write the lender a post-dated check to deposit on payday, at the cost of about $15 per hundred. The cost is commensurate with the risk of making a short-term, unsecured loan. After factoring in defaults and overhead, payday lenders only generated about 12 cents on the dollar in actual profit.
Online lending was a further innovation, allowing consumers to avoid the embarrassment of entering a storefront while providing them with the convenience of borrowing from home. Rates are higher to reflect not only the convenience factor, but the sizable degree of fraud and misrepresentation by borrowers intent on stealing the lender’s money since there was no person-to-person contact.
Yet Connecticut remains mired in the past, restricting access to credit even as wages remain flat and inflation continues to rise, making each earned dollar worth less.
So when an Indian tribe offers consumers an opportunity to make a choice about obtaining credit, the state tries to block them from doing it. Malloy claims to be protecting consumers from usurious lenders, yet neither he nor the legislature has ever lifted a finger to offer any other options.
On the contrary, he is harming consumers by forcing them to bounce checks, resulting in truly exorbitant fees that are vastly in excess of those charged by payday lenders. This is always the result of left-wing policies driven in the name of “protection” – they harm those they claim to be helping.
Connecticut consumers don’t need to be “protected” by the nanny state. As Milton Friedman said, “Freedom equals choice…there is nothing that does so much harm as good intentions.” Connecticut must let Native American tribes enjoy their sovereignty and offer whatever products and services they wish, and let consumers decide for themselves if they wish to avail themselves of those products, including credit.