A law due to go into effect Jan. 1 capped interest rates at 36% on loans up to $ 10,000.
The new restriction – a multi-year effort by MP Monique Limón that resulted in her Assembly Bill 539 – is seen by advocates as a belated crackdown on the lending industry’s habit of charging triple-digit interest on consumer loans between $ 2,500 and $ 10,000.
Supporters of the legislation have said astronomical rates disproportionately targeting people of color and overwhelming the poorest consumers, often leaving families in financial difficulty with ruined credit after they have no choice but to default on high interest loans.
But before the legislation got Gov. Gavin Newsom’s signature this fall, a handful of online businesses said during earnings calls that they will partner with foreign banks to continue charging higher interest.
“As you know, in California a law called AB 539 continues to move forward,” said Jason Harvison, CEO of Elevate Credit. in July. “We hope that we can continue to serve California consumers through sponsorship banking that are not subject to the same rate limitations offered at the state level.”
State banks are not bound by the usury laws of another state, which means that legislatures have a struggling to enforce their rules on third-party vendors.
As part of the strategy, known as the “rent-a-bank” arrangement, the banks create the loan and then sell it to the lender, who can continue to charge high interest to the consumer. It is a legally dubious arrangement that Congress and the courts got tangled with it for years.
Since discovering his strategy, Limón, D-Goleta, issued a stern rebuke and a note of caution in recent letters to Elevate and two other companies – Curo Group Holdings and Enova International – which are expected to collaborate with foreign banks.
“Such intentions seek to undermine the will of Californians as expressed by their democratically elected representatives, and such efforts will meet stiff opposition from state enforcement agencies,” Limón warned. in letters written to company executives and obtained by The Bee of Sacramento.
The trio face significant losses in a growing California market, as Golden State borrowers increasingly turned to midsize installment loans last year.
One third of 1.6 million loans issued in 2018 fell between $ 2,500 and $ 4,999, depending on the California Department of Business Oversight. More than half of these loans carried triple-digit interest.
Elevate, Curo and Enova “accounted for about a quarter of all loans that would be covered by the new rules and have annual percentage rates of at least 100 percent,” last year, according to American Banker.
Limón’s warning was echoed in the concerns of members of the United States House Committee on Financial Services on Dec. 4, when committee members urged Federal Deposit Insurance Corporation President Jelena McWilliams to strengthen regulations on leasing a bank.
Representative Katie Porter, a California Democrat, asked about McWilliams’ plans to stop “predatory lenders” who plan “to grant loans at these interest rates in states that have chosen through the Democratic process to prohibit these rates ”.
McWilliams said the agency does “Regulate state interest rate caps or what is permitted or usury under state law“, Although agreements with third parties are considered” unfavorably “by the federal agency. However, in a November proposal, the agency did not address the question of who is the “real lender” in such deals.
The lack of clarity is a disappointment to consumer advocates, who say it has now led lenders to bypass California restrictions.
“This is the most brazen effort I have ever seen from 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 is important that everyone crack down on this.”
Lenders and their lawyers discredit any idea that they are evading the restrictions of AB 539.
Instead, said Mary Jackson, CEO of the Online Lenders Association, “third party relationships” will increase competition, lower prices for consumers, and provide a fair rate of return for lenders working with borrowers at. risk.
An Enova spokesperson said in an email that the company’s mission is “to help hard-working people access fast, reliable credit.”
“We uphold evidence-based laws and regulations, and as a lender and approved manager, we comply with applicable laws and regulations wherever we operate,” the Enova statement continued.
Despite the notoriety of the “rent-a-bank” agreements used to avoid state rate caps, Limón said there was no longer a legislative solution on the table. Banking partnerships are not a loophole created by AB 539, she said.
“It is not a question of badly drafted legislation,” Limón told The Bee. “It is the problem of a small number of lenders who try to subvert the law.”
Oversight is in the hands of California law enforcement agencies, including the DBO and Attorney General Xavier Becerra. The two were notified of the lenders’ plans by Limón’s office.
DBO commissioner Manuel P. Alvarez said in a written statement to The Bee that his agency was “concerned” about the reports.
“When an approved lender in California openly tells shareholders that it is considering passing the origin of the loan from its California license to a third-party banking partner, there is concern that the licensee is still the real lender.” , said Alvarez.
An Elevate official confirmed in an email that DBO had asked the company “to update its business plan as it is a requirement of state law.” The spokesperson also said the company “does not offer or plan to offer installment loans in California,” but later clarified in a follow-up statement that it “does not plan to offer non-AB 539 installment loans in January. 1. “
The attorney general generally refuses to answer questions about 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 “programs and other efforts to evade California law.”
Assembly Speaker Anthony Rendon D-Lakewood made AB 539 a passing priority this year and supported the measure during ground votes on the bill.
In an interview with The Bee on Tuesday, Rendon called the lenders’ strategy “shrill,” “arrogant” and “repulsive.”
“If you can’t survive as a lender without forcing triple-digit interest – sometimes up to 200% – on your loans, you shouldn’t be in business,” he said afterwards. wrote on Twitter. “It is unethical, disgraceful and will be illegal very soon.”