Stern warnings to lenders mulling end run around California rate caps

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Policymakers in both Washington and Sacramento issued a stern warning this week to high-cost lenders that hope to evade a new cap on consumer interest rates in California: Don’t even think about partnering with banks.

A recently enacted California law establishes a rate cap of around 36% for a category of installment loans that previously had no legal ceiling. Even before Democratic Gov. Gavin Newsom signed the measure, executives at three companies that charge triple-digit annual percentage rates in the Golden State spoke publicly about their efforts to make an end run around the restrictions.

To do so, the companies would partner with out-of-state banks, since depositories generally have the legal ability to apply their home states’ interest rate rules across the country.

But in congressional testimony Thursday, Federal Deposit Insurance Corp. Chairman Jelena McWilliams said that anyone who thinks so-called rent-a-bank schemes have gotten a green light from the FDIC is mistaken. “And we are not going to allow banks to evade the law,” she stated.

Last month, federal banking regulators proposed rules designed to make clear that interest rates permissible on bank loans would not be affected by their sale to a nonbank. While the proposal was widely seen as industry-friendly, the FDIC also stated that it views unfavorably firms that partner with a state bank solely with the goal of evading other states’ laws.

The California law applies to consumer installment loans between $2,500 and $9,999. Last year, three companies — Elevate Credit, Enova International and Curo Group Holdings — accounted for roughly one-quarter of all loans that would be covered by the new rules and had annual percentage rates of at least 100%. The law is set to take effect next month.

Executives at all three lenders have indicated in recent months that bank partnerships could allow them to continue charging high rates in California.

During an earnings call last month, Elevate CEO Jason Harvison said that the Fort Worth, Texas-based firm had signed a term sheet with one of its existing bank partners.

“They are comfortable with going into California,” he said.

On Wednesday, California Assembly member Monique Limón, who sponsored the new law, issued a warning to Elevate, which operates under the Rise Credit brand.

“The state of California will not abide Elevate Credit’s thinly veiled attempts to continue business as usual,” she wrote in a letter to the company, which was obtained by American Banker. One of the arguments Limón made in the letter was that California courts and regulators are likely to enforce the state law.

The following day, Manuel Alvarez, the commissioner of the California Department of Business Oversight, expressed his own concern regarding lenders that are seeking to evade the new law.

“Consumers deserve the protections afforded by the new rate cap law, and compliant companies deserve a level playing field,” Alvarez said in a written statement.

An Elevate spokesperson said in an email Thursday that the company’s bank partners operate in full compliance with all federal banking laws and regulations.

“As the fintech partner to banks, Elevate provides marketing services and licenses its technology platform to banks. As the originating lender, it is each individual bank’s decision whether or not to offer loans,” the email read.

The Elevate spokesperson also stated that neither any of its current bank partners nor any banks with which it is in discussions intends to originate installment loans on the company’s platform in California after Jan. 1.

The California law passed despite the opposition of lenders that charge triple-digit APRs, but it had the support of certain lower-cost lenders.

Consumer installments lending has been growing rapidly in California in recent years. In 2018, lenders originated nearly 820,000 loans in the state with balances of between $2,500 and $9,999, up from about 700,000 in 2016 and 415,000 in 2013.

Last year, approximately 56% of the fixed-rate loans that would be subject to the new California law had annual percentage rates of 40% or higher, while the rest had lower APRs, according to state data.

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Consumer lending Payday lending Fintech Interest rates Law and regulation California