A tribal lender is a financial institution on tribal land, owned and operated by the Native American community.
Like casinos built on tribal land, tribal lenders operate under tribal sovereignty rather than state law.
While they must follow federal laws regarding consumer lending and finance, they are exempt from specific state laws.
Let’s take a closer look.
What is NAFSA?
Tribal lending began with the rise of financial technologies (FinTech) over the past decade, explains Clifton Cottrell, Director of Policy and Research at NAFSA.
Cottrell says, “For tribes geographically and economically isolated, e-commerce represents an opportunity for Native communities to connect with consumers across the United States.”
NAFSA loans are typically easier to acquire than conventional personal loans, and offer more flexible payment programs. However, they also charge higher-than-average annual percentage rates (APRs).
Tribal lending vs. payday lending
Many refer to the loans offered by NAFSA members’ Tribal Loan Entities (TLEs) as payday loans. However, this nomenclature is deceptive — tribal loans are more like installment loans than payday loans. While they share the relatively high APRs of payday loans, their more flexible payment structure makes them a safer choice for borrowers.
According to Cottrell, tribal online installment loans have specific advantages over storefront payday loans. Small dollar installment loans are structurally similar 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.” Also unlike payday loans, installment loans do not magnify their costs with rollover fees.
Payday loans are known for propagating a cycle of debt, or “loan churn.” But the well-defined installment payments of tribal loans all go directly to paying off the principal debt. This makes tribal loans a much safer and less exploitative option than payday loans.
However, tribal loans are still expensive forms of credit. Although they offer larger loan amounts and more flexible repayment plans than conventional loans, they also charge higher-than-average APRs. As such, you should only apply for tribal loans in emergencies, when other cheaper sources of credit are not available.
Eligibility for tribal loans
To secure a tribal loan, you need not be part of a Native American tribe. Tribal loans are available to all.
Cottrell says each of NAFSA’s tribal lending members set their own eligibility requirements to secure a loan. Most lenders will set age restrictions (e.g. requiring borrowers to be 18 or older) and employment restrictions. They will also typically require the borrower to verify that they have a bank account.
In order to borrow from NAFSA lenders, borrowers must:
- Confirm their employment status.
- Possess a verified bank account.
- Make an average income over $40,000/year.
- Have their average span of indebtedness last less than two months.
The average NAFSA borrower is a middle-income American who can’t get a loan from mainstream credit bureaus and banks, and wants to avoid the debt cycle propagated by payday loans.
Advantages of tribal loans
Many Americans cannot secure loans from 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 the traditional lending system neglects over 65 million adults.
Payday loans are one option for this group. However, these loans can be predatory and throw borrowers into an endless cycle of debt.
The TLEs of NAFSA provide options for these underserved Americans, offering a safer alternative to payday loans.
Cottrell explains that NAFSA’s TLEs use unique credit algorithms that allow them to assess creditworthiness without conventional credit scoring procedures.
Beware of posers
Be wary: you cannot trust all lenders that offer tribal loans. Some lenders claim to be tribal lenders to avoid the rules and regulations applied to payday lenders.
In 2016, California won a case involving lenders who claimed tribal status to sidestep state laws. These lenders demanded immunity due to their affiliation 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 real connection to the tribes. 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.
Non-NAFSA certified lenders who claim to offer tribal loans may not offer the same “above board” business practices. Be wary and give priority to NAFSA certified TLEs.
Check out some tribal lenders
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