Today's Trends in Credit Regulation

Massachusetts Division of Banks Takes Action Against Tribal Lender
By Justin B. Hosie, Thomas P. Quinn, Jr. and H. Blake Sims

If you have trouble sleeping, you likely have seen the advertisement on late night television: promises of a loan that will put thousands of dollars into your bank account the next day based only on your signature. If you take assignment of or service consumer loans originated by a Native American tribal lender, you now have another worry to keep you up at night. Massachusetts is the latest state to attack tribal lending, as evidenced by a series of recent enforcement actions by the Massachusetts Division of Banks.

Tribal lending often involves a Native American tribal government or tribally owned entity (“arm of the tribe”) offering credit from tribal reservations, to consumers residing across the United States. In some circumstances, entities owned by individual tribal members rather than the tribe itself also make such loans from tribal land. Tribal lenders take the position that the loans are lawfully entered into on tribal land in accordance with tribal law, and that borrowers electronically agree that tribal law governs the loan transaction. State Attorneys General in California, Colorado, and elsewhere have contended that these transactions violate state law. To date, many courts have found that state agencies lack the power to bring tribal entities into state courts.

However, other decisions have noted that while tribal governments and arms of tribal governments are immune from state law, entities owned by individual tribal members, service providers, and other third parties may not always benefit from such immunity. Moreover, other cases, including an April 15th decision in Colorado involving Western Sky, suggest that loans from reservations to state residents are loans made “in” the consumer’s state of residence, and thus, state law applies.

In early April, the Massachusetts Division of Banks issued a series of cease orders against Western Sky Financial, LLC, three secondary market purchasers of its loans and two entities providing ancillary services (loan servicing and collections) in connection with the loans. The core focus of the actions against both Western Sky and the secondary market purchasers is a familiar one for those following the Division’s recent enforcement activity against payday lenders: the commonwealth’s small loan act. However, there are several important nuances to these latest enforcement actions.

Like most states, Massachusetts requires the licensure of non-bank parties engaged in the business of making small dollar, high interest loans (under Massachusetts law extensions of credit less than $ 6,000 with rates and fees greater than 12%). The reach of the licensing requirement is expansive, covering not only funding creditors but also parties that arrange, guarantee or purchase “small loans” - such as the secondary market purchasers targeted in these enforcement actions. Involvement of an unlicensed party in any aspect of the small loan process renders the loan void and uncollectible.

While action by the Division against payday lenders is neither new nor uncommon, these most recent actions involve several issues that will have potentially significant implications for the finance company industry. The first is due to the unique nature of the funding creditor. Western Sky is owned by a member of the Cheyenne River Sioux and operates its Internet lending operations exclusively on tribal land in South Dakota.

Given the scope of the Division’s actions against the purchasers of the Western Sky loans, the final resolution of the sovereign immunity issue may be a non-issue. Under Massachusetts law, a purchaser of a small loan is considered to be engaged in the business of making such loans to the same extent as the funding creditor. In light of this, the Division specifically directed each of the loan purchasers (none of whom either hold a small loan license or has the ability to independently make a sovereign immunity claim) to:

  • Cease collecting (or attempting to collect) any principal, interest, finance charges or any fees related to the loans made to Massachusetts residents;
  • Refund all interest, finance charges and fees collected from Massachusetts residents during the past four years (and provide the Division with evidence of such refunds);
  • Provide the Division with reports regarding all loans made to Massachusetts residents during the most recent four years; and
  • Cease further assignments of the loans currently held.

Whether the Division will ultimately seek to enforce the voiding provision of the small loan statute and compel the return of principal amounts paid by Western Sky borrowers remains to be seen. While clearly the Division was most keenly focused on curtailing the activities of unlicensed parties, it also tagged licensed debt collector Delbert Services Corporation with a cease order in connection with the Western Sky loans. Among other things, the Division alleges that Delbert committed unfair and/or deceptive acts by attempting to collect loans rendered void by virtue of their origination and subsequent purchase by unlicensed parties. In light of these allegations, the Division ordered Delbert to immediately cease collection and to refund Western Sky borrowers any collection fees it retained in connection with their collection. Delbert was also ordered to provide the Division with reports detailing the reimbursements and a list of borrowers that were the subject of its collection efforts and/or negative credit bureau reporting.

Beyond the specific action taken against Delbert, the Division also issued an “Industry Notice Relative to the Collection of Illegal Loans in Massachusetts.” In this communication, the Division informed its licensed debt collectors that it is their responsibility “to ensure that they do not facilitate the creation or collection of illegal loans” and one means of doing so is to confirm that agreements with collection clients properly evaluate and address the relevant risks. At a minimum, agreements should include representations and warranties by the lender that the loans to be collected are valid and enforceable under applicable law – and indemnifying the collector from losses that may arise if that is not the case.

Precisely how these issues will be resolved will be interesting to observe. Until all of the dust settles parties involved in any aspect of the small loan industry – creditors and service providers alike – should consider conducting additional due diligence to ensure that the loans they are involved with are properly originated to avoid issues similar to those facing Western Sky. Indeed, rather than solving problems, these particular loans only served to create a host of new ones.

Justin B. Hosie is a partner in the Chattanooga, TN office of Hudson Cook, LLP. Justin can be reached at 423-490-7564 or by email at

Thomas P. Quinn, Jr. is a partner in the Fall River, MA office of Hudson Cook, LLP. Tom can be reached at 774-365-4758 or by email at

H. Blake Sims is a partner in the Chattanooga, TN office of Hudson Cook, LLP. Blake can be reached at 423-490-7563 or by email at

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