New York Attorney General Sues High-Interest Lender

New York State’s top prosecutor filed suit on Monday against an online lender that offers short-term loans at interest rates of more than 300 percent, the latest warning shot in a sweeping battle by state authorities to enforce local interest rate caps.

Eric T. Schneiderman, New York State’s attorney general, sued Western Sky Financial and its affiliates, which claim connections to American Indian tribes â€" ties that the lenders have argued immunize them from federal and state laws.

Visitors to Western Sky’s Web site are greeted by a logo of three teepees cast against a yellow sky. The lender, which says it operates “within the exterior boundaries of the Cheyenne River Sioux Reservation” in South Dakota, has argued that the tribal affiliation puts Western Sky beyond the reach of state regulators, including Mr. Schneiderman.

Mr. Schneiderman was not persuaded. In the lawsuit, which was filed in New York State court, Mr. Schneiderman accused the lenders of violating usury laws that cap interest rates on loans at 25 percent.

From their perch online, the lawsuit said, the lenders engage in “an illegal and deceptive scheme to originate high-interest, personal loans to consumers in New York.”

Mr. Schneiderman’s office contends that Western Sky and its affiliates have made at least 17,970 costly loans to New York residents since 2010. The interest and fees alone, the lawsuit says, amount to nearly $185 million. The lender, Mr. Schneiderman said in the lawsuit, “preys upon New York consumers facing financial hardships with limited options.”

In his lawsuit, Mr. Schneiderman outlined his suspicions about how the operations work. Once consumers apply for the loans through Western Sky’s Web site, Mr. Schneiderman said, their applications are shuttled to subsidiaries in California, which finance the loans. The arrangement, the lawsuit said, means that the loans are in Western Sky’s “name only,” while the subsidiaries “bear the risk.”

With his action on Monday, Mr. Schneiderman joins a growing group of state prosecutors fighting to keep online lenders from flouting state restrictions on the loans â€" a campaign that has gained urgency as government officials try to shield residents, desperate for cash, from the expensive loans.

Almost since their inception two decades ago as storefront check-cashing stores, payday lenders have been hounded by controversy. As states steadily impose interest rate caps, the lenders have shifted their operations to more hospitable places, including Belize, Malta and the West Indies, where they can more easily evade the statewide ceilings on interest rates.

Extolling the benefits of operating offshore in 2005 deposition, a former used-car dealership owner, who operates the lenders through a shell corporation in Grenada, put it starkly: the move to foreign places offers “lawsuit protection and tax reduction.”

At an industry convention in 2011, payday lenders singled out Cancun, the Bahamas and Costa Rica as particularly promising places to set up shop.

Grappling with the increasingly hostile state laws, several lenders, including Western Sky, are forging ties with American Indian reservations. Through these pacts, the lenders argue, they are part of a “sovereign nation” and are not subject federal and state laws.

Still, the prosecutors are redoubling their efforts to police the lenders. In at least nine states, including Colorado and Missouri, regulators have taken aim at the lenders with ties to American Indian tribes.

New York State’s action against Western Sky comes on the heels of several other regulatory actions. In April, Western Sky was fined by Oregon’s Department of Consumer and Business Services, which accused the lender of pitching its loans with interest rates of 342 percent “through an aggressive TV and radio advertising campaign.” Minnesota’s attorney general, Lori Swanson, also sued Western Sky for violating state interest rate caps.

In her July suit, Ms. Swanson said that lenders “used Western Sky as a front” to mislead borrowers.

That action came after Colorado’s attorney general sued Western Sky in 2011, accusing it of illegally making roughly 200 loans to state residents.

In a promising development for Colorado, a district court judge said in May that the lenders’ tribal ties did not shield Western Sky from state law. He noted, according to court filings, that borrowers obtain the loans while residing in Colorado, not on the South Dakota reservation.

A spokesman for the company said, “Western Sky Financial is the largest private employer on the impoverished Cheyenne River Indian Reservation.”

Now, the battle with Western Sky is shifting to New York. Last week, Benjamin M. Lawsky, New York’s top banking regulator, sent letters to 35 online lenders, including Western Sky, ordering them to “cease and desist” from making the “illegal” loans, according to documents reviewed by The New York Times.

As part of its clampdown on payday lenders, New York authorities are also scrutinizing the banks that provide a critical gateway for the lenders to gain access to borrowers’ bank accounts. The link is an important lifeline. The banks, state officials say, enable the lenders to automatically withdraw loan payments from borrowers’ checking accounts, even in states where the loans are effectively outlawed.

Mr. Lawsky also reached out last week to 117 banks, imploring them to stop the online lenders from gaining access to New York residents’ checking accounts.

In his lawsuit against Western Sky and its affiliates, Mr. Schneiderman also highlighted the banks’ role in allowing money to flow from New Yorkers to the lenders. One lender, the lawsuit said, “repeatedly debited money” from “bank accounts in the state of New York.”