Jenadee Nanini

Tribal Sovereignty and Fintech Regulations: The Future of Co-Regulating in Indian Country

Native American tribes possess something special-tribal sovereignty.1 “Tribal sovereignty includes tribes’ right to govern themselves, define their own membership, manage tribal property, and regulate tribal business and domestic relations.”2 Tribal sovereignty also recognizes the existence of a government-to-government relationship between tribes and the U.S. government.3 This relationship often complicates the intersection of tribal, state, and federal law. This is increasingly true in a world connected online. Specifically, it has spurred debate in regard to online lending and co-regulation of financial technology in Indian Country.4 While tribes try to grow their economies through financial technology opportunities, outside third parties are seizing the opportunity to exploit tribal sovereignty and immunity as a means to make large profits “on” the reservation via the internet through online “rent-a-tribe”5 models. Tribes must be able to regulate these online financial entities because the impact is imminent and the need for financial technology is Indian Country is a means of survival for the tribe.

Economic development in Indian Country is scarce.6 Tribes are typically located in isolated areas and are becoming more dependent on technology advancements and e-commerce to maintain economic sustainability and connectivity. Economic stability in Indian Country often comes from gaming which alone is at least a $30 billion-dollar industry,7 federal funding, and more recently from e-commerce and other internet businesses. A growing need to increase the number of tribal entities online, build tribes’ economic status, and engage with online lending naturally drives tribes to engage in financial technology ventures.

Tribes have been quick to embrace financial technology in Indian Country. Tribes located in remote areas without sufficient traffic to engage profitably in casino gambling have found revenue from consumer lending over the internet for example.8 Some tribes regulate tribal enterprises, provide online lending, educate and protect consumers, and use financial technology to increase tribal lending opportunities. Many tribes have created individual tribal lending entities (hereinafter “TLE”), which are typically tribal chartered and funded by a third party.9 TLEs make loans over the internet to consumers throughout the United States.10 These loans may be on terms that are unlawful under state laws where the borrowers reside.11 Tribes aim to gain revenue through these ventures and to adequately regulate the practice. However, due to the lack of funding tribes need a third party to fund these entities. The third parties capitalize on this model, earning massive profits and circumventing state laws—using the location of the tribes.12

In 2010, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) to recover from the financial crisis in 2008.13 The Dodd-Frank Act directed the Consumer Financial Protection Bureau (CFPB) to respect the status of tribal governments as co-regulators and to allow tribes to oversee e-commerce businesses and protect consumers.14 Prior to the Dodd-Frank Act, “federal enforcement of substantive consumer lending laws against non-depository payday lenders was generally limited to civil prosecution by the Federal Trade Commission (FTC).”15 However, no reported decisions could be found regarding the FTC’s assertion of jurisdiction over TLEs.16 Thus, CFPB now is in new terrain with no precedent of asserting jurisdiction of TLEs in Indian Country. TLEs are considered “covered persons” under the Act.17 However, tribes are not stated in the definition of “covered persons.”18 In fact, tribes likely will argue given their sovereignty, tribes alone have the power to decide whether to and on what terms they may lend to others online.19 Currently, three tribal lenders are asking that the Ninth Circuit halt the mandate to comply with civil investigation demands by the CFPB 20 The tribal lending companies plan to take the split decisions regarding the question of the proper structure of CFPB’s authority under the Consumer Financial Protection Act over tribes and tribal companies to the Supreme Court. 21

In 2012, the Native American Financial Services Association (“NAFSA”) was formed in order to advocate for Native American sovereign rights to regulate and to enable tribes to offer responsible online lending products.22 This would allow tribal regulators to control the exploitation of financial technology issues such as the “rent-a-tribe” model. Through the protection of consumer rights and sovereign immunity, NAFSA “provides vital services to tribally operated lenders serving the under-banked with better short term financial services, furthering economic development opportunities in Indian Country.”23 This entity has become vital in facilitating tribes’ co-regulation in areas such as online lending. Nonetheless, as technology advances, the federal government continues to increase oversight. For example, in 2016 the Office of the Comptroller of the Currency (OCC) released “Supporting Responsible Innovation in the Federal Banking System: An OCC Perspective” to support responsible innovation in the federal banking system.24 To adjust to the ever-changing laws, regulations, and technology some tribes have followed suit and developed their own regulations or commissions. For example, the Otoe-Missouria Tribe established the Consumer Finance Services Regulatory Commission to protect consumers and online lending businesses, which other tribes have also done.25 In 2016, the Tunica Biloxi Tribe of Louisiana started a regulatory commission to oversee tribal consumer lending.26 The tribe recognized that the federal government has taken the role in lending through the Consumer Financial Protection Bureau (CFPB), and so that is the model the tribe looked at.27

In 2016, tribes actively continued to request that the United States Congress honor tribal sovereignty and ensure the CFPB does as well with any rule they produce on short-term lending.28 Tribes can sufficiently regulate online lending themselves. John R. Sotton, Chairman of the Otoe-Missouria Tribe, stated in The Hill, “…As sovereign nations it is time for Washington [D.C.] to recognize that our businesses are not only legal and lawful, but have strict regulations already in place providing oversight of our tribal enterprises and ensuring consumers are protected.”29 Moreover, Sherry Treppa, Chairperson of the Habematolel Pomo of Upper Lake, stated that she remains “concerned that the CFPB is developing its proposed action in a vacuum without consulting with tribes to learn about the innumerable tools that we have developed…”30 She too urged Congress to “take an approach that respects tribal sovereignty and one that takes account of both consumer need and the robust self-regulation that sovereign tribes have established.”31

Tribes should be allowed to regulate or co-regulate in the financial technology space when the tribe has created tribal laws and commissions that are consistent with federal regulations. Tribes are in the best position to understand and guard against “rent-a-tribe”32 models. Many outside lenders take advantage of tribes and sovereign immunity. For example, CashCall tried to exploit state lending laws and limits by conducting business on reservations.33 The U.S. District Court for the Central District of California recently ruled against such behavior in a win for CFPB.34 This presents a typical scheme with online lending that the tribe should be able to regulate or co-regulate to prevent.

Amid fast-paced change surrounding the Dodd-Frank Act,35 the right for tribes to co-regulate will be an issue in e-commerce and financial technology to watch. Most recently, President Trump signed an executive order to erode much of the Dodd-Frank Act. Trump directed his Treasury Secretary nominee to draft a report within 120 days identifying laws, treaties and regulations that conflict with his de-regulatory principles.36 Results of the new administration’s actions could potentially impede or erode the tribal right to co-regulate and will impact the ability of tribes to control their own e-commerce. Given that tribes have unique needs and practices, local control over the sovereign nation and their own entities makes sense. A change to local control could impact how tribes interact with outside players, manage short-term lending, and a rollback could be detrimental to their economic status if tribal needs are not accurately calculated by federal regulations. Arguably, tribes know their industries best and will be able to develop regulations specific to each tribe more effectively. A sovereign nation that meets regulation standards and regulates their own entities sufficiently should be able to act parallel to a federal regulation that does the same thing. We should continue to honestly follow the CFPB Tribal Consultation policy37 as federal regulations advance and allow co-regulation with tribes.