A tribal lender is a financial institution that is based on tribal land and is owned and operated by the Native American community.
Similar to casinos found on tribal land, tribal lenders operate under tribal sovereignty rather than state law.
While they are required to follow all federal laws regarding consumer lending and finance, they are not beholden to specific state laws. Let’s take a closer look.
Tribal lending is different than payday lending
Clifton Cottrell, Director of Policy and Research at the Native American Financial Services Association (NAFSA), explains that tribal lending has its genesis in the rise of financial technologies (FinTech) over the past decade.
NAFSA was established in 2012 and represents about a dozen tribes involved in online small dollar installment lending.
Cottrell says, “For tribes geographically and economically isolated, e-commerce represents an opportunity for Native communities to connect with consumers across the United States.”
The loans offered by NAFSA members’ Tribal Loan Entities (TLEs) are often called payday loans, but NAFSA says they are installment loans, not payday loans.
Cottrell says that tribal online installment loans have advantages over storefront payday loans. He explains that small dollar installment loans are structured similarly to conventional loans, in which a portion of the principal and interest are repaid each period.
“This provides borrowers more flexibility month to month, instead of being stuck with one large lump sum repayment characteristic of payday loans.
Typical small dollar installment loans range from $500-$2000 with repayment periods between six months and two years.” Another difference? Installment loans do not “roll over” as many payday loans do.
Because payments are required to go toward the principal of the loan and the payments are defined, installment loans can help deter the cycle of debt, or loan churn, that can occur with payday loans that keep renewing and adding fees.
However, tribal loans are still expensive forms of credit that should only be used in emergencies as short-term loans if other cheaper sources of credit are not available. Although tribal loans often have larger loan amounts and more flexible repayment plans, their equivalent APRs are similar.
Who is eligible to borrow from a tribal lender?
To secure a tribal loan, you need not be part of a Native American tribe. Tribal loans are open to all.
Cottrell says each of NAFSA’s tribal lending members set their own eligibility requirements to secure a loan, He adds, “In general, lenders will have age restrictions (for example: must be at least 18 years old), employment requirements, and, at a minimum, require the consumer have a bank account.”
Advantages of tribal loans
Many Americans are underserved by traditional lenders. A survey conducted in 2015 by The U.S. Census Bureau and FDIC revealed that 27% of Americans either have no bank account or they are “underbanked. “
In other words, they have a bank account but still rely on alternative financial sources. This means that over 65 million adults are slipping through the traditional lending system.
Payday loans are one option for this group. However, these loans can be predatory and throw borrowers into an endless cycle of debt.
The Tribal Lending Entities that belong to NAFSA are attempting to reach those who are underserved and offer them a better alternative to payday loans.
Cottrell explains that NAFSA’s TLEs use unique credit algorithms that allow them to assess creditworthiness outside of conventional credit scoring procedures.
Profile of NAFSA’s tribal lending borrowers
- Confirmed employment
- Verified bank account
- Average income over $40,000/year
- Mean indebtedness of fewer than two months
- Average borrowers are middle-income Americans abandoned by mainstream credit bureaus and banks
Beware of posers
In recent years, some lenders have claimed to be tribal lenders to avoid rules applied to payday lenders.
In 2016, California won a victory in a case involving lenders that were doing business through half a dozen different names including Ameriloan and OneClickCash.
These lenders wanted immunity from state laws because they claimed to be affiliated with the Miami Tribe of Oklahoma and the Santee Sioux Nation of Nebraska.
The court ruled that, although the lenders were tribal entities in name, they had little connection to the tribes in practice. According to an article in the Los Angeles Times, the court found “scant evidence that either tribe actually controls, oversees, or significantly benefits from the underlying business operations of the online lenders.”
TLEs that are members of NAFSA must comply with best practices on lending, operations, marketing, and payments.
Any member of NAFSA has gone through a full business licensing process and must abide by a strict tribal council approved lending code. NAFSA’s lenders have also each set up an independent regulatory commission.
Check out some tribal lenders
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