Kanawha Co. court says lender must comply with subpoena

By Jessica M. Karmasek | Nov 16, 2011


CHARLESTON -- A West Virginia circuit court says an Internet payday lender claiming affiliation with a Native American tribe is not immune from a lawsuit and must comply with state Attorney General Darrell McGraw's investigative subpoena.

In a decision entered Oct. 24, the Kanawha Circuit Court also ordered the lender to cease making loans and engaging in collection activity until it does comply.

The case began last year after McGraw's office started to receive complaints from state consumers who had obtained payday loans over the Internet from Payday Financial LLC.

Payday Financial, which did business as Lakota Cash, is based in Timber Lake, S.D. It is owned by Martin A. Webb, who is an enrolled member of the Cheyenne River Sioux tribe.

Payday Financial and Webb both refused to comply with McGraw's investigate subpoena. In turn, the attorney general sued them.

Though Payday Financial, itself, is not a Native American tribe, it tried to claim tribal immunity because Webb is a tribal member.

The company also asserted it was entitled to tribal immunity because the loans made to West Virginia consumers were accepted and entered into on the reservation in South Dakota.

Kanawha Circuit Judge Louis "Duke" Bloom rejected the company's claim of tribal immunity.

Bloom said in his 10-page order that Payday Financial was organized under the laws of South Dakota, not tribal laws, and was owned and controlled by Webb individually.

The judge noted that the company failed to provide any evidence in court that it operated for the benefit of the tribe, as opposed to Webb's individual benefit and profit.

Bloom also held that the loans were made and were to be performed in West Virginia, not on the reservation in South Dakota.

West Virginia is not the first state to bring action against Payday Financial.

Several other states, including Maryland, Colorado and Missouri, also have gone after the company because of its Internet payday lending activities in their states.

In each case, Payday Financial has asserted tribal immunity and resisted state regulation of its lending activities. To date, no final orders have been issued in those other enforcement actions, according to McGraw's office.

Historically, payday lenders have sought ways to skirt state laws that prohibit payday loans, such as in West Virginia.

They tend to claim that making the loans over the Internet protect them because they aren't actually making the loans in a particular state.

Now, more and more payday lenders are turning to the tribal immunity claim, according to an investigation by the Center for Public Integrity published earlier this year.

The center, which describes itself as the country's "oldest and largest nonpartisan, nonprofit investigative news organizations," noted that last year's financial reform law gives the new Consumer Financial Protection Bureau the power to regulate payday lenders.

However, the center says it remains to be seen whether the agency will actually go after those lenders attempting to use tribes to gain immunity.

McGraw says attorneys general nationwide, himself included, are becoming increasingly concerned with the claims.

That is why Bloom's ruling is "welcome news," he said Wednesday.

Payday loans are short-term loans or cash advances, typically 14 days, secured by a post-dated check or, when made over the Internet, secured by an agreement authorizing an electronic debit for the full loan amount plus interest from the consumer's account.

Internet payday loans are electronically deposited into consumers' accounts and require payment of interest with annual percentage rates typically ranging from 600 to 800 APR. That is more than 44 times greater than the maximum allowable rate -- 18 percent APR -- for consumer loans in West Virginia.

Consumers who default are frequently subjected to aggressive, often unlawful debt collection abuse and harassment.

McGraw's office has been investigating the Internet payday lending industry since 2005.

As of today, his office has completed settlements with 113 Internet payday lenders, collection agencies and affiliated service providers, yielding more than $2.75 million in refunds and cancelled debts for nearly 8,500 West Virginia consumers.

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