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The Last Enclaves of Banking Freedom

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To a hammer, everything looks like a nail.

To the army of regulators in the Obama administration, every lender looks like a potential problem that could mushroom into an A.I.G. debacle. They have spread their regulatory tentacles under the auspices of Dodd-Frank legislation to virtually every nook and cranny of the banking world.

The sole enclaves of banking choice are Native American tribes endowed with sovereign powers pursuant to treaties or otherwise. They offer sovereign lending to the spiraling number of the unbanked or under-banked who have been priced out of services offered by traditional lenders because of heavy-handed and costly Obama regulation.

Sovereign lenders are not targets of Occupy Wall Street. Their unbanked or under-banked borrowers are not clamoring for sovereign lending regulation by the Consumer Financial Protection Bureau of the Federal Reserve, or state or local government.

The reason is self-evident. The vast array of financial regulation inaugurated by the Obama administration under the banner of consumer welfare has dried up lending and hiked costs to traditional bank depositors. With friends like regulators, you can afford no enemies. No consumer is forced to utilize a sovereign lender. It is a matter of informed choice based on all the alternative lending options. And sovereign lenders compete among themselves for patronage. There is no sovereign lender monopolist. As the proverbial wisdom of owlish farmers goes, "If it ain't broke, don't fix it."

Like mercy, sovereign lending is twice-blessed. Borrowers' needs for immediate funds are satisfied. And jobs and wealth are created for Native American tribes. Sovereign lending has the potential to create thousands of jobs, and generate millions in revenue annually for economically challenged Native Americans.

It would be a monumental understatement to assert that Native American tribes have been historically exploited by the federal, state, or local governments. Wounded Knee is exemplary. Indeed, treaties have been so frequently broken and fiduciary duties dishonored that Congress established the Indian Claims Commission Act of 1946 to make partial amends. The United States Supreme Court elaborated on a handful of the treaty violations in United States v. Sioux Nation of Indians, 448 U.S. 371 (1980).

Under existing federal law, the special sovereign status of Indian tribes under the United States Constitution denies federal, state, or local arms of government authority to regulate lending businesses domiciled on tribal lands. The Supreme Court has characterized Indian tribes as "domestic dependent nations" or "quasi-sovereign tribal entities."

The status of the sovereign powers of Indian tribes, as interpreted by federal law, has been concisely summarized by Indian law maven Felix Cohen, in his Handbook of Federal Indian Law:

The whole course of judicial decision on the nature of Indian tribal powers is marked by adherence to three fundamental principles: An Indian tribe possesses, in the first instance, all the powers of any sovereign State. Conquest renders the tribe subject to the legislative power of the United States, and, in substance, terminates the external powers of sovereignty of the tribe, e.g., its power to enter into treaties with foreign nations, but does not by itself affect the internal sovereignty of the tribe, i.e., its powers of local self-government. These powers are subject to be qualified by treaties and by express legislation of Congress, but save as thus expressly qualified, full powers of internal sovereignty are vested in the Indian tribes and in their duly constituted organs of government.

The Indian Reorganization Act of 1934 was enacted to strengthen tribal self-government and to preserve tribal culture. When Congress intends to encroach on tribal autonomy, it does so explicitly, not by implication, as with the Indian Gaming Act of 1988. Congress, however, has shied from legislation that would regulate lending activities conducted from tribal lands, in part because of the value of trial and error in fashioning enlightened public policy. What Justice Louis D. Brandeis said in New State Ice Company v. Liebmann, 285 U.S. 262 (1932) about States serving as laboratories for public policy experimentation applies in spades to diverse and independent tribal sovereigns: "It is one of the happy incidents of the federal system that a single courageous state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country."

There remains, however, a perfectly legal way for the Consumer Financial Protection Bureau or states to attack sovereign lending: issue or enact more consumer and business friendly lending rules to attract the current customers of sovereign lending, i.e., build a better mousetrap.