Deliver the keynote speech Last week, at the Consumer Federation of America’s 2022 Consumer Assembly, CFPB Associate Director Zixta Martinez indicated that the CFPB was “taking a close look” at “rent-a-bank” programs.
Deputy Director Martinez commented: “[s]Some lenders try to use [relationships with banks] circumvent state interest rate caps and licensing laws by claiming that the bank, not the non-bank, is the lender.” She explained that “Lenders using Rent-a-Bank programs have unusually high default rates, which raises the question whether their products cause borrowers to fail”. She reported that the CFPB’s Consumer Complaints Database “uncovers a number of other significant consumer protection concerns about certain banking partnership-related loans.”
So far, the CFPB’s enforcement actions have only related to tribal loans, particularly in his enforcement action against CashCall. The CFPB’s lawsuit broke new ground by alleging violations of UDAAP based on CashCall’s efforts to collect loans that were allegedly void in whole or in part under state law. The CFPB’s complaint alleged that the loans in question, which were made by a tribesman, were void in whole or in part as a result of state law, since CashCall has “de facto” or “genuine” lenders based on the substance of the transactions as such charges excessive interest and/or fails to obtain a required license.
The district court agreed with the CFPB that because CashCall was the “true lender” of the loans, the tribe associated with the loans did not have a sufficient relationship with the loans for the court to enforce the tribal option provision in the loan agreements and there was no other reasonable basis for the choice of tribal laws. Accordingly, the district court found that CashCall engaged in a deceptive practice within the meaning of the CFPA in servicing and collecting the loans by creating the false impression that the loans were enforceable and that borrowers were required to redeem the loans under the terms of their loan agreements .
On appeal, the Ninth Circuit Court ruled that the district court was correct in both denying the choice of law and applying the law of the borrower’s home state, thereby voiding the loans. It called the tribal entity’s role in the transactions “economically non-existent” and “having no purpose other than to make the transactions appear to have any relation to the tribe”. According to the Ninth Circuit, “The sole reason for the election of the parties [tribal] Law [in the loan agreements] was to advance CashCall’s plan to circumvent state usury and licensing laws.”
However, it should be noted that the Ninth Circuit has specifically rejected the use of a “true lender” theory as a basis for its decision. In response to CashCall’s objection to the circuit court’s conclusion that it was the “true lender” of the loans, the Ninth Circuit Court declared that “[t]o To the extent that CashCall relies on cases involving banks, we note that banks have different considerations as federal law anticipates certain state limitations on the interest rates charged by banks.” Comment that “[w]We don’t consider how the result here might differ if [the tribal entity] had been a bank,” the Ninth Circuit stated that “we need not use the concept of a ‘true lender’, much less establish a general test to identify a ‘true lender’”. Legal questions merely had to consider the “economic reality” of the loans, which “reveal[ed] that the tribe had no material relationship to the transactions.”
Most importantly, the Ninth Circuit rejected CashCall’s argument that a finding of deceptive practice under the CFPA could not be based on a deception of state law. It found no support for the argument in the CFPA, noting that while the CFPA prohibited the establishment of a national usury rate, the CFPB had not cash call because the usury and licensing laws of each state still applied.
Ms. Martinez’s comments raise the possibility that the CFPB will now seek to use UDAAP outside of the tribal context to challenge non-banks involved in banking partnerships by denouncing violations of state usury and licensing laws based on the theory that the partnership is a “rent-a-bank scheme.” However, as many of the banks involved in such partnerships are smaller banks over which the CFPB has no supervisory or enforcement powers (i.e. banks with assets of no more than $10 billion, the primary federal regulator of banks, might have done so if the CFPB contested such partnerships.
Partnerships between non-banks and banks are currently under siege from several directions. Four Democratic members of the California Legislature recently sent a letter to the FDIC, urging the agency to take action against FDIC-regulated banks that work with non-bank lenders to make expensive consumer loans. on June 1, 2022, a class action was filed against fintech lender Opportunity Financial, LLC (OppFi) in a Texas federal district court, in which the named plaintiff alleges that OppFi engaged in a “rent-a-bank” program with a state-chartered bank to obtain loans at higher interest rates than permitted under Texas law. OppFi is also involved Litigation in California state court where the California Department of Financial Protection and Innovation is attempting to apply California’s usury law to loans made through OppFi’s partnership with a state-licensed bank by claiming that OppFi is the “true lender” for the loans.