California probes potential violation of new rate-cap law

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California's financial regulator has launched an investigation of an auto-title lender that partnered with a Utah bank in an alleged effort to evade a new state interest rate cap.

The California Department of Business Oversight said in a Thursday press release that it has issued a subpoena to Wheels Financial Group, which offers auto-title loans under the LoanMart brand. The subpoena seeks information about the Encino, Calif., company’s relationship with the $466 million-asset Capital Community Bank in Provo, Utah.

The regulator said it wants to determine whether the relationship is so extensive that it represents a direct effort to evade a consumer protection law that took effect on Jan. 1. The agency contends that such an effort would be a violation of state law.

The law, passed last year, imposed a rate cap of 36% plus the federal funds rate on certain installment loans, including many auto-title loans. Following the law’s passage, executives at a few high-cost lenders spoke publicly about the possibility of a workaround involving partnerships with banks, which are generally allowed to export their home states’ rate caps.

LoanMart, which previously offered auto-title loans with triple-digit interest rates in California, stopped making state-licensed loans this year, the Department of Business Oversight said in its release. The agency stated that LoanMart now purports to be a servicer and marketer of loans, made by the Utah bank, that have interest rates of more than 90%.

Manuel Alvarez, the Department of Business Oversight’s commissioner, vowed to enforce the 2019 law, which passed despite opposition from high-cost lenders. The agency’s announcement marked the first public disclosure of an investigation into potential violations of the law.

“We will not sit idly if the same exorbitant-interest credit is being marketed, processed, and serviced by the same company as before, distributed through the same channels as before, and to the same target customers as before,” Alvarez said in the release.

Stephanie Segura, chief compliance officer at LoanMart, said that the company has been answering questions and sharing documents with the Department of Business Oversight since February. In a written statement, she expressed confidence that LoanMart's activities are fully compliant with applicable state or federal laws, and do not constitute an evasion of the 2019 California law.

The Department of Business Oversight is seeking emails and other documents tied to the genesis and parameters of the relationship between LoanMart and Community Capital, which operates as CCBank. Responses to the subpoena are due in October, the agency said.

In 2017, the company that operates under the LoanMart brand agreed to pay $450,000 as part of a settlement with the Department of Business Oversight, which had alleged numerous violations of state law.

Update
This story has been updated to add comments from Stephanie Segura, the chief compliance officer at LoanMart.
September 04, 2020 1:42 AM EDT
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