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A model law

A newly drafted model law may help bring loans to Indian Country.

March 1, 2006


Douglas Clement Editor, The Region

If you're going to borrow money from someone, it's a good idea to have a clear understanding about the terms of the loan: When is it due? What's the interest rate? If you don't pay it back on time, what's the penalty? Can the lender take something of yours if you don't adhere to the terms?

This may all sound straightforward, but if you and the lender speak different languages, share different cultures or have different histories when it comes to lending, misunderstandings are remarkably easy to come by. Lending in Indian Country has been impeded by just such a lack of understanding. Businesspeople in the United States recognized in the 1800s that interstate commerce was being impeded by differences in state laws. Half a century later, a Uniform Commercial Code (UCC) was adopted by all states to establish a (more or less) common understanding.

The problem isn't unique to Indian Country, of course.

In the early 1990s, as commerce began to expand on Indian reservations, it became clear that commercial codes might also improve understandings between Indians and non-Indians on business matters, particularly regarding "secured lending."

Secured lending uses "personal" property as collateral for a loan (as opposed to "real" property like land or something permanently attached to the land, such as a house). It therefore differs from mortgage lending (a home mortgage, for instance, where the house serves as collateral) or unsecured lending (such as a credit card, with relatively high interest rates).

Because secured lending doesn't rely on land—which can't readily serve as collateral on Indian reservations because much of reservation land is held in trust by the U.S. government—it's the type of lending most conducive to business in Indian Country. But without clear understanding between tribal members who want to borrow and outside banks or other financial institutions that may be interested in lending to tribal members or their businesses, secured lending is still difficult.

Rules for lending

Enter the Model Tribal Secured Transaction Law. It's a mouthful, but basically it's a model law for tribes to consider adopting in order to facilitate business in general and credit in particular. The Model Law was just completed in August 2005 by a committee of the National Conference of Commissioners on Uniform State Laws—a nonprofit legal association that focuses on improving uniformity among state laws—following a four-year drafting process.

"Secured transaction laws are a crucial piece of the legal foundation for all free market economies because they establish the rules for borrowers and lenders for secured lending," said Susan Woodrow, a member of the drafting committee and community affairs managing project director at the Helena Branch of the Federal Reserve Bank of Minneapolis. "In Indian Country today, these laws—to the extent tribes have adopted them, and only a few have—tend to not be uniform, which creates barriers. And many tribes don't have them at all, so lenders are reluctant to lend because tribes, for the most part, have jurisdiction over commercial transactions in Indian Country."

Lenders are less likely to provide financing if they don't have assurance that the terms of the loan agreement are clear to all involved and consistent with the state laws they're familiar with. The Model Law was drafted on the basis of the particular part of the UCC which pertains to secured transactions (Article 9), so it provides that reassurance to commercial lenders outside Indian Country.

But the Model Law has also been drafted in close consultation with tribes across the United States, so it provides reassurance to tribes that common understandings in Indian cultures are being respected as well. For example, it explicitly recognizes the importance of tribal sovereign immunity, a critical issue in Indian Country. In a sense, then, it's a legal emissary between tribal and nontribal worlds, with the mission of developing a greater flow of business credit, just as the UCC did among states decades ago.

Woodrow and other members of the committee that drafted the Model Law have been traveling across the country to explain its purpose and the means by which tribes might adopt it into tribal legislation. The committee has also drafted an implementation guide that explains the Model Law in plain language and offers guidance to tribal legislative bodies. Nonetheless, adoption will probably be a slow process; after all, it took 10 years for all 50 states to adapt and adopt the UCC.

And even then, more will be called for. "Equally important," Woodrow pointed out in a recent article, "are tribal courts that are perceived to be fair and impartial and that are competent to adjudicate commercial cases." Nonetheless, the Model Law is an important start. As Karlene Hunter of Lakota Express, an Indian-owned business on the Pine Ridge Indian Reservation in South Dakota, emphasized, the adoption of commercial codes by tribes is essential for economic development on Indian reservations. "You have to have them," she said, "if you're going to do any type of business."

See related articles in March 2003 fedgazette.