The 300% Loan

| Thu Feb. 10, 2011 1:16 AM EST

The Wall Street Journal reports today that payday lenders are increasingly incorporating not in states with lax lending laws, but with American Indian tribes:

Because of the sovereign immunity granted to tribes by the U.S. government, they are shielded from interest-rate caps and other payday-loan regulations. Tribal lenders can even lend in the 12 U.S. states where lawmakers have kicked out the rest of the payday-loan industry.

....All it takes to make a deal are a willing tribe and an eager payday lender. The lender usually incorporates on tribal land, agreeing to pay the chief a salary of a few thousand dollars a month, according to people familiar with the agreements. Such payments can balloon if the tribe has relationships with more than one lender, a common practice.

Most payday lenders have no physical presence on tribal land. To go into business with a tribe, they typically start making loans in the tribe's name from the lender's existing call center, according to industry consultants.

In October, Peg Calvird of Suffolk, Va., got a payday loan for $600 from American Web Loan Inc....The loan's interest rate was 300%, far above Virginia's legal limit of 36%.

For now, I'll assume that credit card companies can't do this, since if they could they already would have. Let's just hope that the financial reform law didn't accidentally open up a loophole that makes it possible.

But here's a serious question: if you take out a payday loan from one of these guys, and then fail to pay it back, what can they do to you? I suppose they can still wreck your credit rating, but what else? Aside from harassment, what enforcement mechanism is available to them to get their money back?