Online and tribal payday lenders: does your state's law apply?

An online payday lender doesn’t get to ignore your state’s law just by being online, or by saying in the contract that tribal or foreign law applies. In CFPB v. CashCall (9th Cir. 2022), a federal appeals court refused to apply a tribal choice-of-law clause and applied the borrowers’ own state law instead. Under it, the loans were invalid.

That doesn’t mean every online loan is void. It means the contract’s fine print isn’t the last word, and it’s worth checking.

What happened in the CashCall case

CashCall made high-cost online loans through Western Sky, an entity on the Cheyenne River Sioux reservation. The loan contracts said tribal law governed, which was meant to keep state interest-rate limits and licensing laws out of the picture.

The Ninth Circuit didn’t accept that. It found the Tribe “had no substantial relationship to the transactions,” declined to apply tribal law, and applied the law of the states where borrowers lived. Under those laws the loans were invalid. The court also held that collecting money borrowers didn’t owe under their state’s law was a deceptive practice under federal consumer financial law.

It’s one appeals court’s decision, in a case the CFPB brought, so how it bears on your loan depends on your state and your facts. But it’s a federal appeals ruling on almost exactly this setup.

The penalty mattered too. The trial court had fined CashCall $10.3 million; the Ninth Circuit vacated that and sent it back for a higher, tier-two penalty running from September 2013, and also reopened the question of restitution to borrowers.

The FTC has also brought cases against lenders operating on Native American reservations that it said were used to evade state and federal consumer protection laws.

How to check whether a lender is licensed

Start with your state’s page. Each one names the state’s lending regulator, links to its license lookup where the regulator publishes one, and summarizes what the state allows, checked against the statute and the regulator and dated.

Have these ready when you look:

• The lender’s exact legal name, from your loan agreement or bank statement (the name on your bank debit may not match the website’s brand)
• Any license number on the website or contract
• The state named in the “governing law” section of your contract

If you can’t find the lender on your state regulator’s list, call the regulator and ask. Regulators handle exactly this question.

Even the payday industry’s own trade association, CFSA, has a voluntary best-practices code saying internet lenders should be licensed in each borrower’s state and follow that state’s rules. That’s an industry code, not law, but it shows the expectation.

If your lender isn’t licensed, or the loan breaks your state’s limits

Don’t just stop paying and hope. Do this:

1. Gather your paperwork. The loan agreement, every payment and fee from your bank statements, and any emails or texts from the lender.
2. Protect your account. Revoke the lender’s permission to debit you and place a stop payment with your bank at least 3 business days before the next withdrawal. See how to stop payday loan withdrawals.
3. Complain to your state regulator and attorney general. They can tell you whether the loan is legal in your state and whether you owe what the lender says.
4. File with the CFPB. Submit a complaint online or call (855) 411-2372.
5. Get legal help if they sue or threaten to. The Legal Services Corporation has a legal aid finder. What a collector can and can’t do is in can payday lenders sue you.

Watch for fake debts

Some people get calls about online payday loans they never took, or already paid. The FTC has acted against collectors of “phantom” payday debts. If a collector contacts you, ask for the validation notice in writing and dispute anything you don’t recognize within the 30-day window.

Getting out from under it

Whether the loan turns out to be valid or not, you’ll want a plan for what you do owe. A payday alternative loan from a federal credit union costs no more than 28% a year. A nonprofit credit counselor can help you sort out which debts are real and what to pay first. The full sequence is in how to get out of payday loans.