Four Democratic members of the California State Legislature recently sent a letter to the Federal Deposit Insurance Corporation (FDIC) urging the agency to take action against FDIC-supervised banks that partner with non-bank lenders to offer high-cost installment loans.
Two of the letter’s authors, California Senator Monique Limon and Assemblyman Tim Grayson, also sponsored Assembly Bill AB 539, passed in 2019, which caps the annual interest rate at 36% plus the federal funds rate for consumer loans of at least $2,500 but less than $10,000 from approved lenders under the California finance law. Despite California’s usury law, FDIC-supervised banks have the ability to export their home state’s interest rate. According to the letter, at least nine high-cost lenders partnered with six FDIC-supervised banks to create consumer loans with interest rates that would exceed state interest rate caps. In their letter, the lawmakers urge the FDIC to “crack down on these schemes” to “evade state laws that protect consumers from unaffordable interest rates.” A coalition of consumer advocacy groups raised similar concerns in a letter to the FDIC in February.
The letter explains that while states have tools to prosecute these loan agreements, these tools are more expensive to use and less likely to be effective than the typical enforcement authorities provided to state financial regulators. One such tool is the “true lender” doctrine, in which a state shows that the true lender is not the bank whose name appears on the loan agreement, but rather the non-bank lender who predominant economic interest in the loan. The letter mentions as an example the trial currently in litigation in a California state court between a non-banking company, Opportunity Financial, LLC (OppFi), and the California Department of Financial Protection and Innovation on whether the California law on Usury applies to loans made through OppFi’s partnership with FinWise Bank, a state-FDIC-registered bank located in Utah. Recognizing that the legal issues will likely take years to resolve, lawmakers are imploring the FDIC to use its oversight, regulatory, and enforcement tools to put an end to these lending partnerships.
California is far from alone in criticizing such partnerships. Other state authorities that have launched or threatened “true lender” attacks on model banking programs include authorities in DC, Maryland, New York, North Carolina, Ohio, Pennsylvania, West Virginia and Colorado. In addition, a growing number of states, including Illinois, Maineand New Mexico— Adopted anti-avoidance provisions tied to their state interest rate caps, allegedly in an effort to reach out to non-bank participants in banking model programs.
While we doubt the FDIC will close these programs while the OppFi litigation is ongoing, it is not unprecedented for the FDIC to close bank-model loan programs with non-banks involving high-cost payday loans. . The FDIC and OCC did so many years ago in response to similar requests from consumer advocacy groups. The big difference this time is that the APRs charged today are significantly lower than the APRs charged in closed FDIC and OCC payday loan programs.