Finding affordable credit is difficult in Indian Country.
More than 85% of tribal lands don’t have a bank, and among financial institutions on or near tribal lands, only 33% offer start-up loans and just 29% percent offer small business loans.
To finance a business, an American Indian and Alaska Native business owner may enter into a loan agreement with another party using secured transaction codes.
Lenders are more willing to lend when they can rely on a legal code to ensure that they will be repaid in the event of a default.
Protection for Lenders and Borrowers
A secured transaction is an agreement between two parties in which one of the parties gives property (other than real estate) as collateral, or security, for a loan.
There are two types of secured transactions. One involves a “possessory security interest,” and another involves a “nonpossessory security interest” or “lien.”
A code of law, or legal code, is needed to enforce the liens or security interests of creditors.
These codes are particularly important for a nonpossessory security interest, where no property exchanges hands unless it’s necessary.
For example, imagine that Tom and Mary sign a security agreement that gives Mary a lien on Tom’s saddle and gives Tom a loan to access business capital. Tom still retains possession of the saddle. However, if Tom fails to pay off all of the loan, Mary can take possession of the saddle, sell it, and retain the portion of the sale proceeds that she needs to pay off the balance of the loan.
Liens, like the one described in the example, enable businesses to obtain the credit they need to buy equipment and property for commercial purposes. At the same time, they enable consumers to buy tangible items on credit that businesses produce or sell.
If secured transaction codes didn’t exist or weren’t enforced, credit wouldn’t exist.
Fulfilling Tribal Businesses’ Need for Financing
Without such codes and an accurate, reliable, and publicly accessible system for filing claims, tribal businesses wouldn’t be able to finance the purchase of business-related equipment from sellers located outside of tribal jurisdictions because a dealer couldn’t enforce its lien.
Or, if a tribal business were able to access financing, it might end up being at higher interest rates and for shorter terms. The absence of rules would compel creditors to increase borrowing costs to offset risks or refuse to lend altogether.
Model Tribal Secured Transactions Act (MTSTA)
Tribes and tribal members don’t need to write their own secured transactions codes.
The National Conference of Commissioners on Uniform State Laws and a working group of tribal officials have already drafted MTSTA as a template for legislation to facilitate transactions between lenders and tribal businesses.
The model, which was created in 2004 and revised in 2017, was drafted with the objective of creating a uniform tribal secured transactions law consistent with Article 9 of the Uniform Commercial Code in tribal business, legal, and cultural environments.
The MTSTA provides a set of rules that specify how security interests may be created, perfected, and enforced, and who has first rights when two or more competing creditors have legally enforceable interests in the same collateral.
Under this system, a creditor files a financing statement at a public filing office that constitutes notice to other interested parties about security interests in the personal property of the debtor. This financing statement perfects (or makes good against third parties) a creditor’s security interest in most kinds of personal property.
The MTSTA allows a creditor party to repossess collateral after the debtor’s default only by consent of the debtor after the default occurs or through a judicial process, and all repossessions must be done without “breaching the peace.”
Repossession occurs as a last resort by a secured party dealing with loan or other credit agreement payments that are overdue or nonexistent who has obtained from the borrower a financing statement filed in accordance with the code.
A security agreement usually defines what constitutes a debtor’s default. Default occurs when the debtor either fails to make a payment when due or violates his or her security agreement.
After a debtor defaults, the secured party may obtain possession or control of the collateral by written consent of the debtor or by obtaining an order from the tribal court.
A tribe can also insert a provision into its code that prohibits, for example, the pledging of sacred objects as collateral for credit transactions or loans.
DED’s Role in MTSTA Adoption
Tribal adoption of MTSTA is a priority for the Division of Economic Development (DED).
In the past, DED has funded several tribes to explore the adoption of commercial law codes modeled on the MTSTA.
In 2007, with the National Congress of American Indians, DED also organized the National Native American Economic Policy Summit, which was attended by over 500 tribal and federal representatives. One of the approved recommendations by tribal leaders at the event was to develop commercial codes that could be used or customized for each tribe.
In FY 2012 and FY 2013, DED joined with the U.S. Small Business Administration and the Federal Reserve System to sponsor MTSTA training workshops at six key Indian Country locations. These events discussed how MTSTA adoption could increase creditor and investor confidence in tribal economies and ensure the steady growth of business and consumer credit on reservations.