State can't Reel in Online Payday Loans<

California business regulators are stumbling in their efforts to locate and ban a unlicensed form of high-interest consumer credit: payday loans available on the Internet.

For the past three years, the state Department of Corporations has been trying to force these Internet-only businesses to adhere to the same rules that govern the state-licensed payday loan storefronts that offer short-term, unsecured loans of up to $300.

But many of these Internet operators — with no physical presence in the state and run as tribal entities outside of California — say they are American Indian-owned businesses, linked to sovereign Indian nations and immune from state regulation.

"These are businesses, and they are operated consistent with federal law," said John Nyhan, a Los Angeles attorney for two out-of-state Indian tribes, whose loan operations are being targeted by California regulators. "They have immunity from suit by the state."

The legal concept of treating Indian tribes as sovereign nations repeatedly has been upheld by the U.S. Supreme Court, he said.

The state says it respects tribal sovereignty but also has an obligation to enforce its consumer laws and protect borrowers transacting business in California jurisdiction.

The tribal arguments, so far, have stymied ongoing efforts in court to prohibit the Indian-based Internet companies from loaning money to Californians.

State officials across the nation and consumer advocates say it's impossible to estimate the size of this unregulated industry. But, they suspect that it involves thousands of Web pages generating billions of dollars in revenues nationwide.

Regulated payday lenders, who operate from storefronts, collect about $8 billion a year in interest and fees on $50 billion in loans, according to industry sources.

In August 2006, the California Department of Corporations moved against the unlicensed lenders by issuing a "desist and refrain" order against four Internet payday loan operators, accusing them of violating California law.

Among other things, the law requires that the businesses be licensed by the state, loans be capped at $300 and interest limited to an annualized percentage rate of 459 percent for a maximum 31-day period.

Since then, the order has stalled in state courts over the sovereign immunity issue.

"Internet lending in general is something we've tried to get our arms around, and the tribal issue is a further complication," Corporations spokesman Mark Leyes said. "Any California customer, who is dealing with these lenders, is not enjoying the consumer protections that are in state law."

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