SIOUX FALLS, S.D. — With a population of 450, Timber Lake on the Cheyenne River Indian Reservation sits in one of the poorest and most remote counties in the country.
But government regulators across the country have their eye on the north-central South Dakota town. They say Timber Lake harbors a predatory businessman who has fleeced financially distressed consumers across the country with high-interest loans.
Martin “Butch” Webb, an enrolled member of the tribe, is defending his businesses from legal actions brought by the Federal Trade Commission and state authorities.
Webb owns at least nine Internet lending businesses, according to court records. Regulators accuse Webb and his businesses of illegal lending and collection practices, operating without a license in states and dodging state limits on interest rates.
Webb disputes the accusations leveled by regulators, arguing that conventional banks often charge high interest rates combined with overdraft fees and other charges. He argues he’s just another player in the lending industry.
“I think we’re serving a group of people that are underserved by conventional banking,” he said. “Their demands aren’t being met.”
It’s a complex financial web, complicated by questions of the authority of the federal government to enforce laws on an Indian reservation, where the concept of sovereignty clouds authority.
BACKED BY ELITE WASHINGTON FIRM
Webb has powerful allies on his side. He’s represented against the FTC by a prestigious K-Street law firm in Washington, D.C., Katten Muchin Rosenman. Patrick Dorton, who arranged an interview with Webb, was a special assistant to President Bill Clinton and now is a partner in a Washington public relations firm.
Court records also outline a relationship between Webb’s operation and CashCall, a short-term lender and mortgage business based in Anaheim, Calif. CashCall’s president and CEO is J. Paul Reddam, a philosophy professor-turned-lender who gained fame this year when his horse, I’ll Have Another, won the Kentucky Derby and the Preakness Stakes.
CashCall has faced its own legal problems. In West Virginia this year, a judge ordered CashCall to pay $13.7 million in penalties and cancel $2.3 million in debts owed by West Virginia consumers, said Norman Googel, a senior assistant attorney general who prosecuted the case.
Regardless, the Internet is rife with consumer complaints about his companies. The Better Business Bureau gives Western Sky an F rating.
Payday lenders and high-interest installment companies have used different methods to evade state usury laws. One was to work with banks. Federal law allows a bank in one state to export its interest rates to borrowers in other states. Banks were acting as front companies for high-interest lenders, in essence “renting their charters,” Googel said.
That was particularly true among some banks in South Dakota, where there are no usury rates. In CashCall’s West Virginia case, CashCall was a partner with First Bank & Trust of Milbank.
USING TRIBES TO ‘GET AROUND STATE LAWS’
Federal regulators have cracked down on that practice, and now the lending companies have turned to tribes, which have sovereign immunity.
“Thus far, what we have found is that tribes are playing a nominal role,” Googel said. “The tribes are really being used by the real, outside lender to get around state laws.”
Webb’s situation adds a wrinkle to that. He’s an enrolled member, but his businesses aren’t affiliated with the tribe. But Webb argues that because his businesses are on the Cheyenne River reservation, they operate under the umbrella of sovereign immunity.
“We’re operating within the boundaries of the reservation,” he said. “Therefore, we’re operating under tribal jurisdiction. The people come to us for the loans. We don’t go to them.”
Nathalie Martin, a professor at the University of New Mexico School of Law, has studied the issue of tribes and their relationships with payday lenders and other high-interest loan businesses. She does not think Webb is covered by sovereign immunity.
“I don’t think this is a winning argument,” she said.
“If the lender is literally set up as a tribal corporation and it’s the tribe itself, that’s what is entitled to sovereign immunity, not the person,” Martin added.
Cheyenne River Tribal Chairman Kevin Keckler Sr. said Webb’s lending operation is unrelated to the tribe.
Webb said his companies have sold loans to CashCall. During an interview Friday, Webb was at home recovering from an illness, and he said he didn’t have access to records for how many loans had been sold to CashCall.
A representative of CashCall did not return messages.
BUILT ‘INCH BY INCH’ STARTING IN 2009
Webb, 56, said he has a background in banking, and he started building his operation about 2009. It was a slow process because the remote region didn’t have the Internet infrastructure in place, and the operation has been built “inch by inch.”
He employs 100 people, he said. Another 70 positions will be created with expanded Internet capabilities. It’s major employment for the Cheyenne River reservation, and he said some of his employees haven’t had a family member with a full-time job in three or four generations.
In the industry of high-interest loans and high-interest credit cards, officials justify the rates and fees because their clientele have high default rates. The people who seek such loans or credit cards often have sketchy credit histories that bar them from seeking loans from conventional banks.
Webb said his companies’ rates are high because so many people who borrow don’t pay back their loans. Those who make payments also are paying for those who defaulted. And, he added, consumers are warned.
‘CHEAPER THAN A PAYDAY ADVANCE’
In one television ad for Western Sky Financial, one of Webb’s companies, a spokeswoman says: “Yes, the money’s expensive, but it’s a lot cheaper than a payday advance.”
In another, the spokesman says: “Yes, the money’s expensive, but there’s no collateral required, and you can keep the cost down by paying it back as fast as you can.”
“We’re a very open, honest company,” Webb said.
“He is a tribal member and operates his own business,” Keckler said.
Webb employs tribal members in his operations, and jobs are good for any community, Keckler added. But the chairman wouldn’t comment on the controversy surrounding the businesses.
“That’s between him and the states,” Keckler said.
STATES, FTC SUING OVER OPERATIONS
It’s between Webb and a growing list of states. West Virginia and Maryland courts already have ruled that Webb doesn’t enjoy the benefits of sovereign immunity. His companies are established under South Dakota law and they do not benefit the tribe, according to a judge who ruled in West Virginia.
Colorado also is suing Webb.
“That is going through the judicial process now,” said Carolyn Tyler, spokeswoman for Colorado Attorney General John Suthers.
The Washington State Department of Financial Institutions took action last month against Webb.
“These companies are preying on financially struggling Washington consumers with loans at unconscionable repayment terms,” said Deborah Bortner, director of consumer services, in announcing the action.
But the biggest threat to Webb’s operation comes from the Federal Trade Commission lawsuit filed in federal court in South Dakota. If successful, that action could shut him down.
A spokeswoman for the FTC wouldn’t comment on the case.
GARNISHING WAGES WITHOUT COURT ORDER
The FTC complaint alleges a host of violations. When borrowers got behind on their payments, Webb’s companies would attempt to garnish wages without obtaining a court order, according to the complaint. Collectors working for Webb also disclosed the amounts that debtors owed to employers and co-workers, a violation of federal law.
Lawyers for Webb, meanwhile, have sought to dismiss one portion of the FTC complaint. Borrower loan applications include a notice that, in the event of default, collection actions against the borrower will be brought in the Cheyenne River Sioux Tribal Court. Webb’s lawyers argue the Supreme Court has ruled that tribal courts can exercise jurisdiction in over contracts between Indians and non-Indians.
The FTC argues the loans are off-reservation activity because they are taken out by people who aren’t on the reservation. Thus, tribal jurisdiction doesn’t apply.
A decision on the motion is pending.
Meanwhile, Webb continues to move forward with his expansion plans. To him, he’s offering an honest service while also benefiting his impoverished community. To regulators across the country, he’s a villain.
And if the federal government succeeds in its legal challenge?
“You’d just have to re-evaluate and see if we’d appeal or shut down,” Webb said.