California made triple-digit interest illegal on these loans. Lenders have found a loophole
A law set to take effect on January 1 caps interest rates at 36 percent on loans up to $10,000.
The new restriction — a multiyear effort by Assemblywoman Monique Limón that culminated in her Assembly Bill 539 — is seen by advocates as an overdue crackdown on the lending industry’s habit of imposing triple-digit interest on consumer loans between $2,500 and $10,000.
Supporters of the legislation said the astronomical rates disproportionately target people of color and burden poorer consumers, often leaving financially crunched families with ruined credit after they have no choice but to default on high-interest loans.
But before the legislation ever earned Gov. Gavin Newsom’s signature this fall, a handful of online companies said during earnings calls that they’ll partner with out-of-state banks to continue charging higher interest.
“As you know, in California a piece of legislation named AB 539 continues to move ahead,” said Elevate Credit CEO Jason Harvison in July. “We expect to be able to continue to serve California consumers via bank sponsors that are not subject to the same proposed state level rate limitations.”
State banks aren’t bound by another state’s usury laws, meaning Legislatures have a hard time enforcing their rules over third-party vendors.
Under the strategy, known as a “rent-a-bank” arrangement, banks originate the loan, then sell it to the lender, who can continue charging high interest to the consumer. It’s a legally dubious arrangement that Congress and the courts have tangled with for years.
Since discovering their strategy, Limón, D-Goleta, has issued a sharp rebuke and note of caution in recent letters to Elevate and two other companies — Curo Group Holdings and Enova International — expected to collaborate with out-of-state banks.
“Such intentions seek to undermine the will of Californians as expressed through their democratically elected representatives, and such efforts will be met with stiff opposition from the state’s enforcement agencies,” Limón warned in December letters written to the companies’ executives and then obtained by The Sacramento Bee.
The trio faces major losses in a growing California market, as borrowers in the Golden State increasingly turned to the mid-sized installment loans last year.
A third of the 1.6 million loans issued in 2018 fell between $2,500 and $4,999, according to the California Department of Business Oversight. More than half of that lending carried triple-digit interest.
Elevate, Curo and Enova “accounted for roughly one-quarter of all loans that would would be covered by the new rules and had annual percentage rates of at least 100%,” last year, according to American Banker.
Limón’s admonishing was echoed in concerns by members of the U.S. House Committee on Financial Services on Dec. 4, when committee members urged Federal Deposit Insurance Corporation Chairwoman Jelena McWilliams to heighten rent-a-bank regulations.
Rep. Katie Porter, a California Democrat, asked what McWilliams’ plans were to stop “predatory lenders” who plan “to make loans with those interest rates in states that have chosen through the democratic process to prohibit those rates.”
McWilliams said the agency doesn’t “regulate state interest rate caps or what’s permissible or usury under state law,” though the third-party arrangements are viewed “unfavorably” by the federal agency. However, in a November proposal, the agency did not address the question of who the “true lender” is in such arrangements.
The lack of clarity is a disappointment to consumer advocates, who say it’s now led to lenders skirting California’s restrictions.
“This is the most brazen effort I’ve seen yet by payday lenders to ignore the law,” said Lauren Saunders, associate director of the nonprofit National Consumer Law Center. “This is a totally illegitimate arrangement, and it’s important for everybody to crack down on this.”
The lenders and their advocates discredit any notion that they’re evading AB 539’s restrictions.
Instead, said Mary Jackson, CEO of the Online Lenders Association, the “third-party relationships” will increase competition, drive down pricing for consumers and assure a fair rate of return for lenders working with risky borrowers.
An Enova spokesperson said in an email that the company’s mission is “to help hardworking people get access to fast, trustworthy credit.”
“We support fact-based regulations and laws, and as a licensed lender and servicer we comply with applicable laws and regulations everywhere we operate,” the Enova statement continued.
Despite the notoriety of “rent-a-bank” agreements used to avoid state rate caps, Limón said there was no legislative fix left on the table. The bank partnerships aren’t a loophole created by AB 539, she said.
“This is not an issue of errantly drafted legislation,” Limón told The Bee. “It is an issue of a small number of lenders attempting to subvert the law.”
Oversight is in the hands of California’s enforcement agencies, including DBO and Attorney General Xavier Becerra. Both have been warned of the lenders’ plans by Limón’s office.
DBO Commissioner Manuel P. Alvarez said in a written statement to The Bee that his agency is “concerned” about the reports.
“When a California-licensed lender openly tells shareholders that it plans to pivot loan-origination from its California license to a third-party bank partner, there is concern the licensee may still be the true lender,” Alvarez said.
An Elevate official confirmed in an email that DBO had asked the company “to update its business plan as is a requirement under state law.” The spokesperson also said the company “doesn’t offer nor plan to offer installment loans in CA,” but later clarified in a follow-up statement that it “has no plans to offer any installment loans not in compliance with AB 539 as of Jan. 1.”
The attorney general usually declines to answer questions regarding potential investigations, whether to confirm or deny their existence.
“However,” Becerra’s office said, “we will aggressively enforce AB 539, including in the face of ‘rent-a-bank’ schemes and other efforts to evade California law.”
Assembly Speaker Anthony Rendon, D-Lakewood, made AB 539 a passage priority this year, and put his weight behind the measure during floor votes on the bill.
In an interview with The Bee on Tuesday, Rendon called the lenders’ strategy “strident,” “arrogant” and “repulsive.”
“If you can’t survive as a lender without forcing triple-digit interest — sometimes as high as 200% — on your loans, you shouldn’t be in business,” he then wrote on Twitter. “It’s unethical, shameful, and will very soon be illegal.”
This story was originally published December 18, 2019 at 1:12 PM with the headline "California made triple-digit interest illegal on these loans. Lenders have found a loophole."