Volume 10; No. 2; Spring 1998
Sovereign Lending: One Step Closer in the Northwest
By Craig Nolte, Community Investment Advisor, Federal Reserve Bank
of San Francisco, Seattle Branch
During January and February 1998, the Federal Reserve Bank of San
Francisco sponsored four workshops to discuss and advance issues of credit
need and access in Washington State and Northern Idaho Indian country.
Titled "Sovereign Lending," the workshops were co-sponsored
by Affiliated Tribes of Northwest Indians' Economic Development Corporation,
Federal Deposit Insurance Corporation, and Freddie Mac. Nearly three hundred
participants attended, including tribal leaders, bank officials, and representatives
of non-profit organizations and public agencies. The four workshops collectively
focused on the issues of over 30 Northwest-based tribes. The following
is a synopsis of the key findings and issues that were defined at these
It's no secret that many Indian reservations suffer from high unemployment
rates and widespread poverty. The reasons for these conditions are as
numerous and unique as the tribes who suffer them, but it's a safe bet
that the lack of credit availability hasn't helped the situation. There
are a number of real and perceived barriers that continue to make lending
on reservations a challenge, if not downright difficult. Among these barriers
are issues associated with deficient or ineffective educational efforts,
marketing/outreach, and underwriting standards.
There are hundreds, if not thousands, of articles, publications and seminars
devoted to the subject of Indian culture and access to credit on tribal
lands. Nevertheless, there remains a lack of understanding around a number
of tribal issues, all of which stress the need for the ongoing education
of lenders and other private entities seeking to conduct business on tribal
An important starting point is an understanding that tribal governments
vary from tribe to tribe. Each tribe represents a separate sovereign nation
and has its own set of laws and regulations. Tribal government leaders
can change, just as U.S. government leaders do, and this can affect how
tribal laws are enforced. Why do lenders need to know this? Lyndi Wells,
a partner with the firm Dorsey & Whitney LLP, explains, "Prior
to entering into a transaction with a tribal enterprise, it is essential
that lenders understand the government organization of the tribe. The
method of a tribe's organization affects how powers are distributed, who
can act for the tribe, and what, if any, approvals may be necessary to
carry out a transaction."
Beyond an understanding of a tribe's government structure, Sovereign
Lending a training program for tribal entities (such as the housing authority)
on how to pre-qualify loan applicants. participants identified several
educational needs in which financial institutions I could participate.
These include the provision of:
- small business technical assistance for reservation business owners;
- financial planning and budgeting in tribal area schools;
- job training and entrepreneurship classes for tribal members; and,
- a full-time mortgage and small business credit counselor for each
In addition to the exchange of technical expertise, a greater understanding
of cultural differences will be necessary to foster more productive negotiations
and the expedient resolution of conflicts. Forums such as the Sovereign
Lending workshops provide tribal members and others the opportunity
to discuss cultural differences in a structured environment. The informal
networking that occurs is an added, but important, benefit.
Marketing And Outreach
Lenders attempting outreach to tribal reservations cite remote locations
and uncertainty about effective advertising methods as the primary barriers
for successful marketing efforts. To address these concerns, workshop
developed a list of options that lenders could pursue to enhance their
marketing efforts. Suggestions include the establishment of:
- direct mail advertising to promote products and services;
- ATM's and mobile branches to provide physical access to banking services;
- a training program for tribal entities (such as the housing authority)
on how to pre-qualify loan applicants
Whatever the methodology, it is imperative that marketing and outreach
efforts consider and include the unique characteristics of the "targeted"
tribe. Careful analysis of a tribe's credit needs and governmental structure
will vastly improve a marketing program's chances for success.
Underwriting loans on Indian reservations may cause lenders to feel caught
in a quagmire of concerns: different Universal Commercial Codes, jurisdictional
concerns, income verification difficulties, and land ownership issues.
Raynell Diehl, Banking and Finance Coordinator for Associated Tribes
of Northwest Indians, states, "A majority of tribes across the nation
do not have tribal laws that adopt versions of the Universal Commercial
Code (UCC). In addition, most tribes have not adopted judicial interpretations
or regulatory law governing basic business licensing of an operation,
contract law, or corporate operations that would protect legitimate creditor,
investor and consumer interests. The absence of such laws weakens creditor
and investor confidence in their ability to pursue a range of remedies
pertaining to judgments including appeals, garnishments, attachments,
foreclosure sales and repossessions."
To alleviate issues of creditor confidence, a tribe may adopt a "Tribal
UCC," or portions of the state code, to separate tribal politics
from its business activities. For example, while tribes are immune from
lawsuits arising from contracts or other causes of action, tribes may
waive immunity from lawsuits by adopting a "sue or be sued provision"
in a corporate charter established under its constitution or bylaws. These
kinds of provisions help satisfy a lender's need for clear foreclosure
Although several states have jurisdiction over American Indian civil
and criminal matters, most tribal courts have jurisdiction over civil
matters concerning tribal members. Therefore, if a tribal member defaults
on a loan, collection procedures usually occur in tribal courts. Perceiving
a disadvantage in tribal courts, lenders are less likely to make loans
to tribal members who reside on a reservation. To overcome these perceived
disadvantages, lenders can educate themselves about the distinct judicial
system of each tribe, and any effect on ability to enforce contracts.
Indian lands held in trust may not be conveyed, taxed, or mortgaged without
the permission of the U.S. government. Consequently, Indian lands cannot
be pledged as collateral because legal title rests with the U.S. government.
In other words, Indian lands are not subject to foreclosure. American
Indians and tribes are, therefore, less likely to qualify for loans. Why?
Because lenders perceive these loans to be high risk. And, because resources
unencumbered for collateral purposes are severely limited by the trust
status of Indian lands. Furthermore, the Bureau of Indian Affairs' (BIA)
lengthy processing-time for dispute resolution seems to have discouraged
lending activity. Lenders are hopeful that the BIA's current system will
be reevaluated soon to deliver speedier decisions.
Tribes and tribal members receive trust income from the sale or lease
of land, minerals, timber, water or other investments, but they are not
required to pay taxes on income derived from trust assets. Since lenders
typically rely on tax returns to substantiate income, trust income is
not usually taken into account when lenders determine likelihood of repayment.
In addition, some tribal members involved in seasonal or agricultural
professions, like the fishing industry, do not have the standard employment
and income documentation generally required by lenders to underwrite a
loan. In response to these concerns, workshop participants suggested that
lenders consider requesting information about trust income and begin accepting
alternative income verification documentation such as fish tickets and
receipts of leasehold interest income.
The advancement of many strategies to address the complex issues raised
at the Sovereign Lending workshops left most participants feeling optimistic.
Recommendations to promote credit availability, such as marketing programs,
access to a credit banker, and training on cultural differences will become
more tangible when organized task forces analyze the issues and structure
a game-plan. As each barrier disappears, access to credit will become
increasingly commonplace for current and future generations of Native
For more information on the results of the Sovereign Lending Workshops,
more of which are planned for June and July 1998, please contact Craig
Nolte at the Fed's Seattle Branch at (206) 343-3761.
ABOUT THE AUTHOR
Craig Nolte serves as a Community Affairs Advisor at the Seattle Branch
of the Federal Reserve Bank of San Francisco. In this role, Mr. Nolte
works with the Community Affairs Unit in San Francisco to assist financial
institutions in boosting their CRA performance. In addition, he works
with the Public Information Department in Seattle. Mr. Nolte is also a
commissioned Federal Reserve Bank examiner.
Prior to his career at the Federal Reserve Bank, Mr. Nolte worked for
14 years at the Office of Thrift Supervision in the area of corporate
applications and examinations. He also served as a compliance examiner
for several years. His credentials include an MBA from City University
of Seattle and an undergraduate degree in Finance from Seattle Pacific