High-cost lenders already seeking ways around crackdown in California

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California Gov. Gavin Newsom signed a law last week meant to squash high-cost consumer loans that total billions of dollars each year. But cracks in the measure are already showing.

The new law subjects installment loans of between $2,500 and $9,999 to a rate cap of 36% plus the federal funds rate. It is the product of a compromise between consumer advocates and certain lower-cost lenders, and it passed despite the opposition of lenders that charge triple-digit annual percentage rates.

But to the chagrin of the law’s supporters, high-cost lenders have been signaling that they plan to make an end run around the California law by partnering with out-of-state banks. Banks generally have the ability to apply their home states’ interest rate rules across the country, though federal regulators have often looked askance at efforts by payday lenders to avoid state restrictions by partnering with banks.

Top executives at Enova International, Elevate Credit and Curo Group Holdings — three companies that last year accounted for roughly one-quarter of all loans that would be covered by the new law and had APRs of at least 100% — have indicated that bank partnerships will allow them to continue charging high rates in California. Their comments came during the companies’ earnings calls in late July.

“There’s no reason why we wouldn’t be able to replace our California business with a bank program,” said Enova CEO David Fisher. Chicago-based Enova operates in the nation’s largest state under the CashNetUSA brand.

Executives at Curo, which operates the Speedy Cash brand, also spoke about bank partnership opportunities in California. CEO Don Gayhardt said that the Wichita, Kan., firm has had a lot of practice in adapting to state regulatory changes.

Elevate’s then-chief operating officer, Jason Harvison, who has since become the firm’s interim CEO, said that the Fort Worth, Texas, company expects to continue to serve California consumers through bank sponsors.

Elevate, which operates the Rise Credit brand, will provide an update on its plans during its upcoming third-quarter earnings call, according to a company spokeswoman.

The passage of the California law may disrupt installment loan growth at certain firms next year, according to John Hecht, an analyst at Jefferies. But in a research note last week, Hecht still recommended shares in Enova and Curo, arguing that the impact of the law appears manageable.

For their part, consumer advocates expressed outrage over the high-cost lenders’ plans in California.

“The attorney general, the Department of Business Oversight and private litigators need to let the payday lenders know that they will fight to stop this evasion and uphold the law that protects Californians from predatory lending,” Lauren Saunders, associate director of the National Consumer Law Center, said in a press release.

Saunders also called on the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. to prevent bank partnerships that are designed to enable predatory lending. The OCC last year stated that it takes an unfavorable view of firms that partner with banks for the purpose of evading state interest rate rules.

One of the California law's sponsors, Democratic Assembly member Monique Limón, called lenders’ plans to forge partnerships with out-of-state banks “contemptible” and vowed to work with state officials to enforce the law's clear intent.

“Arrangements where the predominant economic interest lies with the nonbank lender will not be tolerated," Limón said in an email to American Banker. “The state of California will respond swiftly to any arrangements that mask the true lender of high-cost loans in attempts to evade the interest rate caps provided by our state laws.”

When Newsom signed the new state law last week, he said that defaults on expensive installment loans can push families further into poverty. “These families deserve better,” the Democratic governor said in a press release, “and this industry must be held to account.”

But over the years, high-cost lenders have proved adept at exploiting loopholes in state laws. In Ohio, after annual interest rates for payday loans were capped at 28% in 2008, companies registered instead as mortgage lenders.

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