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.
Two of the letter’s authors, California Senator Monique Limon and Assemblymember Tim Grayson, were also sponsors of Assembly Bill 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 made by lenders licensed under the California Financing Law. Despite California’s usury law, FDIC-supervised banks have the ability to export the interest rate of their home state. According to the letter, at least nine high-cost lenders have partnered with six FDIC-supervised banks to originate consumer loans with interest rates that would exceed states’ interest rate caps. In their letter, the legislators 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 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.