Tribes Lose Effort to Block New York From Regulating Their Online Lending

A federal judge has denied a request by two American Indian tribes to stop New York State’s top financial regulator from cracking down on their online lending businesses.

The tribes argued that Benjamin Lawsky, superintendent of the state’s Department of Financial Services, overstepped his jurisdictional bounds in trying to regulate business activity taking place on Indian reservations in Oklahoma and Michigan.

Late Monday, Judge Richard Sullivan, of Federal District Court in Manhattan, issued a ruling dismissing the Indians’ claims, suggesting that because the Internet allows the tribes to reach beyond their reservations’ borders, they had lost their unique protections as sovereign nations.

“Plaintiffs have built a wobbly foundation for their contention that the state is regulating activity that occurs on the tribes’ lands,” Judge Sullivan wrote. “The state’s action is directed at activity that takes place entirely off tribal land, involving New York residents who never leave New York State.”

The Indian tribes had argued that their sovereign status protected them from regulation by New York. The two plaintiffs in the case are the Otoe Missouria Tribe, in Red Rock, Okla., and the Lac Vieux Desert Band of Lake Superior Chippewa Indians, in Watersmeet, Mich. The Otoe Missouria tribe operates American Web Loan and Great Plains Lending, and the Lac Vieux Indians run CastlePayday.com.

“We obviously disagree with how the court has resolved this issue and we will be pursuing an appeal in the hopes of getting a different answer from the court of appeals,” said David Bernick, the lawyer representing the tribes.

At a hearing last month, Mr. Bernick had argued that his clients’ businesses were being ruined by Mr. Lawsky, who was trampling on their federally protected rights as sovereign nations.

“My clients’ businesses are being destroyed because New York has decided that tribal sovereignty doesn’t matter to them,” Mr. Bernick said at the hearing. “This is an exercise in arrogance, and people are suffering as a result.”

In August, Mr. Lawsky’s office unveiled an aggressive campaign against the payday lending industry, seeking to stamp out Internet businesses that offer small, short-term loans at exorbitant interest rates that violate state usury laws. Among the businesses he attacked were several that are run by, or have connections to, Indian tribes across the country.

Mr. Lawsky has argued that he has the power to protect New York consumers from Indian-run businesses that reach beyond their reservations’ borders. The judge appeared to agree with Mr. Lawsky’s position, concluding that the activity New York seeks to regulate is taking place within the state.

“These consumers are not on a reservation when they apply for a loan, agree to the loan, spend loan proceeds or repay those proceeds with interest,” Judge Sullivan said. “These consumers have not, in any legally meaningful sense, traveled to tribal land.”

This is the second decision that has gone against the Indian tribes in as many weeks. On Sept. 26, the Consumer Financial Protection Bureau rebuffed a bid by three Indian online lenders to halt the federal agency from investigating whether their business practices violated federal laws. Richard Cordray, the bureau’s director, rejected the argument that his agency had no jurisdiction over Indian tribes.

“Indian tribes, like individual states, do not enjoy immunity from suits by the federal government,” Mr. Cordray said.