Mark Calabria
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U.S. District Court recently ruled that New York can stop payday lenders from making loans, even when those loans are originated from tribal offices outside New York. This ruling expanded the state’s jurisdiction over lenders to tribal sovereign enterprises. This is not only inconsistent with Supreme Court precedent; it attacks the very notion of tribal sovereignty.

In August, New York’s Department of Financial Services Superintendent Benjamin Lawsky issued a cease-and-desist order to tribal lenders conducting business with New York residents on the basis that their loans violated New York’s cap on interest rates. It might seem silly that Lawsky would try to stop a consensual agreement between lender and borrower, but you can’t blame him too much. He is following the time-honored New York tradition of using government to limit the choices of others. Don’t think people should eat trans fat? Ban it. Drinking too much sugar? Goodbye, Big Gulps.

When it comes to lending, New York has a 16% usury cap on loans. Despite the fact that two people might agree they are both better off if one lends to the other at a rate over 16%, the government of New York has decided it knows best.

New York’s nanny-state preferences aside, the law is clear that the state’s jurisdiction stops at its borders. The State of New York cannot extend its sovereignty over Native American reservations that are not even within the borders of New York, regardless of what Lawsky might think, and the recent court ruling is not likely to hold in the long run.

There were two basic questions at the heart of the dispute that the U.S. District Court had to weigh in its ruling. First, does tribal sovereign immunity apply to commercial activities, such as lending, or is it limited to purely governmental functions? Second, does tribal immunity cover activity where some part of that activity, such as one side of a transaction, exists outside the boundaries of the reservation?

Both questions already have answers.

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Mark Calabria

Mark A. Calabria, is director of financial regulation studies at the Cato Institute.