Challenges and Opportunities in Lending to Native American Tribes
Schey, Diane, The Journal of Lending & Credit Risk Management
RMA Arizona Chapter member Diane Schey is the 1997 firstplace winner of RMA's Paperwriting Contest. Schey, a vice president with Bank of America, Phoenix, Arizona, had approached RMA early in 1997 for information on lending to Native American tribes. Finding relatively little information available, Schey determined to research and address the topic to help others interested in serving Native American banking needs. The Journal is proud to include her article in its issue devoted to community banking.
There are 2.1 million Native Americans comprising 557 Federally recognized tribes throughout North America. More than 400,000 Native Americans live on reservations located throughout the U.S. Economic activity and income on many reservations have increased from the expansion of gaming and economic development programs. At the same time, tribal members continue to be an underserved market through which banks can expand market share, focus on profitable product segmentations, and fulfill Community Reinvestment Act responsibilities. To do so, bankers need to meet the challenges of the unique legal status of Native American tribes, trust lands issues, tribal culture, and decision-making that is often by consensus.
557 Sovereign Nations
Each Native American tribe is a separate sovereign nation with the power to make and enforce laws affecting business, property, secured transactions, and the conduct of its tribal members and non-members on the reservation. Dealing with Native American Nations is similar to dealing with foreign countries and requires individualized negotiations and solutions.
Tribal sovereign immunity prevents their being sued in any court without their waiver of sovereign immunity or their expressed consent to be sued. Sovereign immunity applies only to tribes, not to individual tribal members, unless representing the tribe on official business. While tribes are understandably reluctant to waive sovereign immunity, they can arrange a selective limited waiver. A limited waiver permits the bank to sue only for the loan and restricts remedies to specific assets or revenues (to protect other tribal assets and revenues). A tribe can establish a subordinate entity for a specific transaction and waive the subordinate entity's immunity without affecting the tribe's sovereignty.
Tribes. When the borrower is a tribe, the lender must consider the following factors:
* Who in the tribal government has the power to act/sign/commit for the tribe and what tribal approvals are necessary?
* What is the risk that governmental changes will affect repayment of the credit?
An example of the challenge in lending to tribes, in 1996 the new president of the Navajo Nation, Albert Hale, "decided not to follow through on former President Zah's promise to pay off a more than $2 million loan from Norwest bank. Hale argued that the tribe was not responsible for assuming any of the debt because neither the bank nor the contractor asked for any commitment from the Navajo Nation Council. Instead, they relied on Zah's word that the financial aspects of the deal had been taken care of before construction."(1)
To circumvent possible problems, the lender should perform a thorough due diligence to ensure that:
* The individuals contracting for the credit have the proper authority.
* All necessary approvals - tribal council, Bureau of Indian Affairs (BIA) - are obtained.
* Tribal law finds the purpose of the loan acceptable, permits repayment from tribal funds, and allows the encumbrance of tribal assets that are being pledged as collateral.
* A limited waiver of immunity or an acceptable means of dispute resolution is obtained.
* Tribal law ensures continued commitment, so that governmental changes will not affect the credit.
Legally separate entity. A tribal entity can be chartered to be legally separate from the tribe, either under Section 17 of the Indian Reorganization Act or under tribal codes. …