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 originate high-cost installment loans.
The letter explains that although states have tools for going after these lending arrangements, such tools are more costly to employ and less likely to be effective than typical enforcement authorities provided to state financial regulators. One such tool is the “true lender” doctrine, where a state shows that the true lender is not the bank whose name is on the loan contract but rather the non-bank lender who has the predominant economic interest in the loan. The letter mentions by way of example the lawsuit currently pending in California state court between a non-bank, Opportunity Financial, LLC (OppFi), and the California Department of Financial Protection and Innovation over the question of whether California’s usury law applies to loans made through OppFi’s partnership with FinWise Bank, a state-chartered FDIC-insured bank located in Utah. Acknowledging that the legal matters will likely take years to resolve, the legislators implore the FDIC to employ its supervisory, regulatory, and enforcement tools to put a stop to these lending partnerships.
California is far from alone in its criticism of such partnerships. Other state authorities that have launched or threatened “true lender” attacks against bank-model programs include authorities in D.C., Maryland, New York, North Carolina, Ohio, Pennsylvania, West Virginia, and Colorado. Additionally, a growing number of states—including Illinois, Maine, and New Mexico—have enacted anti-evasion provisions tied to their state interest rate caps, purportedly in an effort to reach non-bank participants in bank-model programs.
While we doubt that the FDIC will shut down these programs while the OppFi litigation is pending, it is not unprecedented for the FDIC to shut down bank-model lending programs with non-banks involving high-cost payday loans. Both the FDIC and OCC did that many years ago in response to similar requests from consumer advocacy groups. The big difference this time is that the APRs being charged today are significantly lower than the APRs charged in the payday loan programs shut down by the FDIC and OCC.