The Native American Financial Services Association (NAFSA) is feeling more than a bit unloved and misunderstood.
Led by Executive Director Gary Davis, NAFSA's self-described mission is "to protect and preserve the sovereignty of Native American tribes, while offering an unprecedented opportunity for tribal economic growth." It does this by helping NAFSA member tribes implement its framework for tribal short-term lending that services the 65 million Americans who are unbanked or underbanked but have access to the internet. Twenty percent of those borrowers—both tribal and non-tribal—typically do not have access to traditional short-term lines of credit like credit cards, do not have credit scores at all or don’t have one high enough to obtain one. In the past, they might have turned to payday lending services, but fully amortized short-term installment lending offered by NAFSA member tribes may be a viable alternative for them.
Often conflated with payday lending, NAFSA member lenders promote approving small loans of $100 to $3,000 or more for emergencies to only highly qualified individuals, with 92 to 95 percent of all applicants turned down to manage the tribes' risk. Given this selectivity, tribes have a 90 percent payback rate. All borrowers must be employed. Borrowers have an average income of more than $43,000. For at least one NAFSA member tribe, the Chippewa Cree, who own Plain Green, the average loan amount is $650 with a more than 400 percent annual percentage rate, or APR (to avoid paying the full APR, most borrowers pay off their loan within 60 days). Borrowers generally repay the loan within 56 days, in biweekly or monthly installments. There is no penalty for paying off the loan early. Individual circumstances determine whether a delinquent or unpaid loan will go to collections, be refinanced, or written off. Sixteen percent of borrowers have had 10 loans in the past year, but borrowers can only take out a new loan once the previous loan is repaid. Standing debt can’t be rolled over into new debt.
In contrast, payday lending "is a type of short-term borrowing where an individual borrows a small amount [of money] at a very high rate of interest" which is designed to be repaid with a post-dated check to the lender "usually on the borrower's next payday," according to Investopedia. Payday loans are generally for $100 to $1,500 with the average loan being $350 and subject to interest rates up to more than 900 percent APR. The average borrower income is $22,476, but 25 percent are unemployed.
Furthermore, although the typical pay-off period is two to four weeks, the average payback period is 199 days. This means borrowers are rolling the remainder of an old loan into a new loan. This results in serial borrowing and in accumulating debt they often cannot repay, which has given short-term lending a bad reputation—18 states have outlawed or highly regulated payday lending because lenders often take advantage of cash-strapped borrowers with aggressive lending and illegal collection practices. NAFSA guidelines were devised to prevent that behavior amongst its member tribes.
With the gaming market saturated, tribes are seeking new engines for economic development. NAFSA is hoping to assist tribes not only get into this underserved market, but offer an alternative to gaming. For geographically remote tribes where gaming isn't an option, short-term lending may be a viable option. Short-term lending also creates jobs in the financial and business sectors, with the ultimate objective being that tribes own and operate the entire enterprise. That typically happens about five or six years into the business for NAFSA tribes.
Getting into this market can be lucrative for a tribe with seed capital or investment partners, as well as a pool of tribal members with skills to perform the necessary functions of the operations, or willing to learn them.
According to Davis, Federal laws and lending codes apply to tribes. Tribes do, as sovereign nations, establish their internal regulations and regulating bodies to ensure compliance. Although tribes are currently not subject to state laws, a recent complaint filed on behalf of the Consumer Financial Protection Bureau (CFPB) against four separate lending operations owned by the Habematolel Pomo of Upper Lake Indian tribe demonstrates how states are attempting to impose state usury laws using the Consumer Financial Protection Act (CFPA). The CFPA derives from the federal Dodd Frank Act which should not apply to sovereign American Indian tribally owned businesses. The complaint alleges violations of the truth in lending act and Title X of Dodd-Frank Wall Street reform and consumer protection act of 2010 for not properly disclosing loan interest rates, and for violating state usury and licensing laws. Although not a NAFSA member, "NAFSA is deeply troubled the CFPB continues to exceed its regulatory authority, with respect to both tribally-owned enterprises...[and]...to trample...the clear rights of a sovereign Indian nation."
So far, NAFSA says full amortized installment lending has been a success story. Jay Abassi, CEO of Plain Green, the wholly-owned Chippewa Cree Tribe lending entity, says the tribe now operates in the 32 most profitable short-term lending states in the U.S. With this $24 billion lending market wide open, Abassi is more than willing to share this platform with tribes trying to get into the same space. According to Abassi, NAFSA acting as a "hub for demonstrating to tribes how big they can get together" in banking due to regulations such as the Bank Holding Act not applying to them, it's only a matter of time before tribes have interstate banking. Abassi sees the need to teach financial literacy that is impossible to learn without being able to open up a checking account, and having an e-commerce operation brings that literacy to tribes.
The Chippewa Cree use their lending profits to maintain and grow the business, and have a significant portfolio. They are also pay uncovered elder costs, amenities like coats for all school children, cultural activities, and rebuilding its clinic, which was wiped out in a flood. Plans for economic development include a grocery store and other basic needs.
Chairman Jim Williams of the Lac Vieux Desert Band echoed Abassi's enthusiasm. His tribe got into the business in 2011 after intense research and preparation. The tribe suffered a huge decline in gaming revenue in the Upper Peninsula of Michigan, so it was probably the first tribe to own its financial services. His message to interested tribes is that this is one of the best businesses for tribes to be in because it harnesses technology and leverages tribal sovereignty to take advantage of regulatory advantages in the financial space.
The tribe employs 40 people, 15 percent of whom are tribal. The revenue funds 140 tribal government employees, provides money for funding government; revenue has supplemented higher education scholarships, created homeownership opportunities, recently built a new tribal medical center, provided new squad cars for law enforcement, created cultural preservation programs, social service programs (burial funds), renovated the tribal court system, tribal elder home care and transport, and a gathering place for long term medical care.
"Before lending, there was no resource to complete the dream." Lending now comprises 40 percent of tribal revenues, and allows the tribe to reach out into the three surrounding counties to service non-tribal people on Medicaid and Medicare as well as veterans.
Davis sums the opportunity up. "Knowing the lay of the land in Indian country offers opportunity unlike any I've ever seen with regard to economic development," given the market size and demand for small loans. Tribes alone can determine whether this opportunity fits their unique situation.