Delivering the keynote address last week at the Consumer Federation of America’s 2022 Consumer Assembly, CFPB Deputy Director Zixta Martinez indicated that the CFPB “is taking a close look” at “‘rent-a-bank’ schemes.”

Deputy Director Martinez commented that “[s]ome lenders attempt to use [relationships with banks] to evade state interest rate caps and licensing laws by making claims that the bank, rather than the non-bank, is the lender.”  She stated that “lenders employing rent-a-bank schemes have unusually high default rates, which raise questions about whether their products set borrowers up for failure.”  She reported that the CFPB’s consumer complaints database “reveals a range of other significant consumer protection concerns with certain loans associated with bank partnerships.”

To date, CFPB enforcement actions have raised “rent-a-charter” challenges only in the context of tribal lending, most notably in its enforcement action against CashCall.  The CFPB’s lawsuit broke new ground by asserting UDAAP violations based on CashCall’s efforts to collect loans that were purportedly void in whole or in part under state law.  The CFPB’s complaint alleged that the loans in question, which were made by a tribally-affiliated entity, were void in whole or in part as a matter of state law because based on the substance of the transactions, CashCall was the “de facto” or “true” lender and, as such, charged excessive interest and/or failed to obtain a required license.

The district court agreed with the CFPB that because CashCall was the “true lender” on the loans, the tribe affiliated with the loans did not have a sufficient relationship with the loans for the court to enforce the tribal choice of law 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 had engaged in a deceptive practice within the meaning of the CFPA when servicing and collecting on the loans by creating the false impression that the loans were enforceable and that borrowers were obligated to repay the loans in accordance with the terms of their loan agreements. 

On appeal, the Ninth Circuit ruled that the district court was correct to both refuse to give effect to the choice of law provision and to apply the law of the borrowers’ home states, thereby causing the loans to be invalid.  It called the tribal entity’s role in the transactions “economically nonexistent” and to have “no other purpose than to create the appearance that the transactions had a relationship to the Tribe.”  According to the Ninth Circuit, “the only reason for the parties’ choice of [tribal] law [in the loan agreements] was to further CashCall’s scheme to avoid state usury and licensing laws.” 

It should be noted, however, that the Ninth Circuit expressly disclaimed use of a “true lender” theory as the basis for its decision.  In response to CashCall’s objection to the district court’s conclusion that it was the “true lender” on the loans, the Ninth Circuit stated that “[t]o the extent CashCall invokes cases involving banks, we note that banks present different considerations because federal law preempts certain state restrictions on the interest rates charged by banks.”  Commenting that “[w]e do not consider how the result here might differ if [the tribal entity] had been a bank,” the Ninth Circuit stated that “we need not employ the concept of a ‘true lender,’ let alone set out a general test for identifying a ‘true lender.’”  In its view, for purposes of the choice of law question, it was only necessary to look at the  “economic reality” of the loans which “reveal[ed] that the Tribe had no substantial relationship to the transactions.”

Most significantly, the Ninth Circuit rejected CashCall’s argument that a finding of a deceptive practice under the CFPA could not be based on deception about state law.  It found no support for the argument in the CFPA and noted that while the CFPA prohibits establishment of a national usury rate, the CFPB had not done so in CashCall because each state’s usury and licensing laws still applied.

Ms. Martinez’ comments raise the possibility that the CFPB will now attempt to use UDAAP outside of the tribal context to challenge nonbanks involved in bank partnerships by alleging violations of state usury and licensing laws based on the theory that the partnership is a “rent-a-bank scheme.”  However, since many of the banks involved in such partnerships are smaller banks as to which the CFPB does not have supervisory or enforcement authority (i.e. banks with $10 billion or less in assets), the CFPB would need to navigate potential concerns that the FDIC, the banks’ primary federal regulator, might have if the CFPB were to challenge such partnerships.

Nonbank/bank partnerships are currently under siege from several directions.  Four Democratic members of the California state legislature recently sent a letter to the FDIC urging the agency to take action against FDIC-supervised banks that partner with non-bank lenders to originate high-cost installment loans.  On June 1, 2022, a class action lawsuit 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” scheme with a state-chartered bank to make loans at rates higher than allowed by Texas law.  OppFi is also engaged in litigation in California state court where the California Department of Financial Protective and Innovation is attempting to apply California usury law to loans made through OppFi’s partnership with a state-chartered bank by alleging that OppFi is the “true lender” on the loans.