Minnesota regulators are, for the first time, challenging a practice in which an Internet lender is allegedly hiding behind tribal sovereign immunity to skirt state laws.
A lawsuit filed Thursday against California-based CashCall Inc. takes aim at the rent-a-tribe phenomenon, which Attorney General Lori Swanson described in an interview as "an emerging problem" that has come under fire elsewhere.
The complaint, filed jointly by Swanson and state Commerce Commissioner Mike Rothman, accuses CashCall and subsidiaries WS Funding and WS Financial of engaging in an "elaborate ruse" to deceive borrowers and regulators and fleece them with illegally high rates on Internet loans.
A lawyer for the company would only say the lawsuit contains inaccuracies.
While Swanson has campaigned against Internet consumer lenders making expensive short-term loans, suing several in recent years, this is the state's first lawsuit against an Internet lender for allegedly hiding behind a reservation to evade state consumer protection laws.
The rent-a-tribe arrangement has emerged as mounting regulations squeeze the business of providing expensive consumer loans over the Internet and lenders seek new ways to ply their wares. More and more tribes are jumping into the Internet consumer finance business, which can be viewed as an attractive economic development tool for a struggling tribe, not unlike casinos.
Minnesota's six-count complaint accuses the companies of operating while unlicensed, charging illegally high interest rates and unjust enrichment. The suit also accuses them of fraudulently claiming loans are subject to the doctrine of tribal sovereign immunity because they're made by a South Dakota company called Western Sky Financial Inc. that is owned by an America Indian tribe member. The loans are quickly sold to CashCall and its subsidiaries.
The companies, which have been running ads on radio and TV in Minnesota, have been making loans from $850 to $10,000 and charging annual percentage rates of up to 342 percent, according to the lawsuit. Someone borrowing $1,000 from Western Sky would pay an origination fee of $500 that is folded into the loan, repaying all $1,500 at an annual percentage rate (APR) of 149 percent.
In Minnesota, a licensed lender making a similar loan could charge a maximum fee of $25 and an APR of about 22 percent.
CashCall, which also makes mortgages, bills its loans as an alternative to payday loans. It says on its website that its personal loans are typically used for one-time purchases or debt consolidation.
Western Sky, which is not named in the lawsuit, is owned by Martin "Butch" Webb, a South Dakota banker who is said to be an enrolled member of the Cheyenne River Sioux Tribe. Western Sky's logo is a sunset sky behind three teepees.
The state asserts in the lawsuit that Western Sky isn't owned by a tribe and doesn't exist for the tribe's benefit but is a South Dakota limited liability company with Webb as its only member. Tribal sovereign immunity doesn't protect an individual member, and so doesn't apply to loans Western Sky makes to Minnesota customers, according to the complaint.
The tribe's chairman declined to comment on the lawsuit.
Webb did not respond to messages, including those left for him at Western Dakota Bank in the tiny reservation town of Timber Lake, S.D., where he is president.
CashCall's founder and owner, businessman J. Paul Reddam, wasn't available for comment. Reddam, who isn't named as a defendant in the lawsuit, founded the online mortgage company known as Ditech.com, a lender that has been called a pioneer of the 125 percent mortgage. Reddam reportedly made a fortune selling Ditech.com to a General Motors Corp. unit.
He's also known as a thoroughbred horse owner whose I'll Have Another won both the Kentucky Derby and the Preakness Stakes in 2012.
A lawyer for CashCall said the Minnesota complaint contained inaccuracies.
"While it would be inappropriate to comment on pending litigation, we look forward to correcting the record in this matter," said Claudia Callaway.
Swanson said she has seen "dozens" of consumer complaints from Minnesotans about CashCall's operation but doesn't know how many people in the state have been affected.
"I think it's a lot," Swanson said. "This potentially could be the biggest one yet."
Nine other states have taken action against either CashCall or Western Sky.
Aimee, a 40-year-old Brainerd woman who asked to be identified only by her first name, said she took out a four-year loan for $2,525 from Western Sky after falling behind on some bills.
She saw a Western Sky ad on television, she said. Immediately the calls and e-mails from CashCall started.
Somehow, she said, the she wound up with finance charges of $11,000.
"It's pretty mind boggling," she said. "You tell yourself 'I'll just do this and pay it back quicker.'
"It's really embarrassing to me that I took a loan like this."
In 2008, the West Virgina Attorney General sued CashCall for running a rent-a-bank scheme in which lenders tried to skirt state usury laws because national banks are allowed to carry the interest rate rules of their home state to other states. A judge ordered CashCall to pay $15 million in civil penalties, refunds, and the canceled debts for nearly 300 West Virginians.
Meanwhile, the Federal Trade Commission has sued Webb and several of his companies, including Western Sky, for garnishing the wages of customers without a court order. That case is pending.
According to court documents, Western Sky began making loans in 2010 and doesn't make any loans to people in South Dakota.
Payday lenders and other high-interest consumer lenders with longer term loans are known for their creative approaches to avoiding consumer protections. Rent-a-bank or rent-a-charter schemes that flourished in the 1990s were stomped out. After migrating to the Internet, consumer lenders tried to argue that they could export the high interest rates of their home states to other states where they operate, avoiding interest rate caps in those states.
Now problematic linkages with American Indian tribes are popping up.
"More and more now, we're seeing the unlicensed Internet lending industry morph to purporting to affiliate with a tribe or a tribal member," said Swanson. "It's the whack a mole problem. This is sort of the latest iteration."