Are tribal loans legal?

They can. Taking you to court to collect is possible, because filing suit is a different issue from whether the lender can be sued itself. According to the Federal Trade Commission, a collector has to sue you and win in court before touching your wages.

Whether that suit would succeed comes down to your state's law. In certain states the debt may not be legally owed in the first place, which would give the lender almost nothing to win in court.

The lender's shield is not unlimited either. Sovereign immunity protects a tribe from suit unless Congress or the tribe waives it. The US Supreme Court upheld this in Bay Mills in 2014, covering even business conducted off the reservation. But the appeals court in Hengle v. Treppa found that the tribe's officers are not shielded, and that state law applies to business done away from tribal land.

Not unless a judge has signed off. The Consumer Financial Protection Bureau states that a payday lender may pull money from your pay or account only when a court orders it after a lawsuit. The agency also cautions that some lenders make these threats while holding no court order whatsoever.

A tribal court cannot step in where it has no jurisdiction over you. Back in 2014, the Federal Trade Commission reached a settlement with lenders run by Martin Webb, which had leaned on tribal ties to take wages illegally. The civil penalty came to $550,000.

Government agencies are the only ones that can sometimes garnish without going to court, for debts such as taxes and other federal obligations. That does not include private lenders.

Even when a court order exists, federal law caps what may be taken on a typical consumer debt. The Department of Labor publishes the numbers behind these limits.

If your take-home pay is only a little above $217.50 a week, the amount that can be taken is small.

For many borrowers, the first goal is stopping the payments from leaving their bank account. Yes, you can cancel the lender's permission to take money from your account, even if you already agreed to it.

1. Send the lender written notice revoking the debit authorization. The Consumer Financial Protection Bureau has a sample letter you can use as a starting point.
2. Let your bank or credit union know you revoked it, so both sides hold the same record.
3. Place a stop payment order with your bank no later than three business days ahead of the next planned debit. You can do this by phone or in writing.
4. When you notify the bank by phone, it may want written confirmation within 14 days, so send that in to keep the order active.

Halting the debits does not erase the loan, and the lender can still claim you owe the balance. Consider a borrower whose tribal lender keeps pulling from her checking account. She revokes the debit permission with both her bank and the lender, using the sample letters, and files a stop payment order no fewer than three business days ahead. These steps can help her stop future withdrawals, but they do not cancel the loan. Her state's law is what decides if she still has to pay the remaining balance.

Being connected to a tribe does not put a lender beyond the reach of the law. A federal appeals court decided that federal consumer financial law applies to tribal businesses. And late in 2018, a group of 15 state attorneys general told a court that lenders affiliated with tribes do not enjoy automatic immunity from state law.

Many agreements contain an arbitration clause, which sends disputes to a private person to decide rather than a courtroom. Judges have struck these clauses down when they permit only tribal law to apply. That was the outcome in Hengle v. Treppa and Gingras v. Think Finance, where courts called the clauses unenforceable and unconscionable. And in CFPB v. CashCall, the judge set aside the contract's tribal-law provision and applied the borrower's own state law in its place.

Interest caps set by states have frequently been the deciding factor. The cases below compare what lenders charged with what state law permitted.

Back in 2013, New York's financial regulator ordered 35 online payday lenders to stop their activity. The agency also warned debt collectors that payday lending is illegal in New York, so those debts are void and unenforceable. Under Virginia law, a consumer finance loan issued without the required license is void. In Pennsylvania, the attorney general settled a case involving an alleged $133 million illegal online payday lending operation that Think Finance ran.