Four Democratic members of the California Legislature recently sent a letter to the Federal Deposit Insurance Corporation (FDIC), urging the agency to take action against FDIC-regulated banks that work with non-bank lenders to make expensive consumer loans.
Two of the letter’s authors, California Senator Monique Limon and Member of Parliament Tim Grayson, were also sponsors of Assembly invoice AB 539, passed in 2019, which limits the annual interest rate to 36% plus the Federal Funds Rate on consumer loans of at least $2,500 but less than $10,000 made by lenders licensed under the California Finance Act. Despite California’s usury law, FDIC-regulated banks have the ability to export their home state’s interest rate. According to the letter, at least nine high-priced lenders have partnered with six FDIC-regulated banks to lend to consumers at rates that would exceed state interest rate limits. In their letter, lawmakers called on the FDIC to “take action against these schemes” to “circumvent state laws that protect consumers from prohibitive interest rates.” A coalition of consumer advocacy groups expressed similar concerns in a letter to the FDIC in February.
The letter explains that while states have tools to track these lending arrangements, these tools are more expensive to use and less effective than typical enforcement agencies provided to state financial regulators. One such tool is the “true lender” doctrine, whereby a state demonstrates that the true lender is not the bank whose name appears on the loan agreement, but the non-bank lender that has the overriding economic interest in the loan. The letter gives examples the lawsuit currently pending in a California state court between a non-bank, Opportunity Financial, LLC (OppFi), and the California Department of Financial Protection and Innovation over whether California usury law applies to loans made through OppFi’s partnership with FinWise Bank, a state -Chartered FDIC-insured Utah-based bank. Lawmakers recognize that legal matters will likely take years to resolve, and are calling on the FDIC to use its supervisory, regulatory, and enforcement tools to put an end to these lending partnerships.
California is far from alone in its criticism of such partnerships. Other state agencies that have launched or threatened “real lender” attacks against bank model programs include agencies 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— have enacted anti-circumvention provisions tied to their government interest rate caps, ostensibly in an effort to reach out to non-bank participants in banking model schemes.
While we doubt the FDIC will discontinue these programs while the OppFi litigation is pending, it is not unprecedented for the FDIC to discontinue bank-model lending programs with nonbanks with expensive payday loans. Both the FDIC and OCC did this many years ago in response to similar requests from consumer groups. The big difference this time is that the APR calculated today is significantly lower than the APR charged in the payday loan programs discontinued by the FDIC and the OCC.