State Regulators and Attorneys General Focus on Predatory Lending
State regulators and Attorneys General continue to address online credit companies' participation in "rent-a-bank" schemes. The Wall Street Journal reported on efforts by California to crack down on high-cost lenders by implementing a new state law that caps interest rates at approximately 37 percent for certain consumer loans. The Journal report follows U.S. House Financial Services Committee ("HFS") consideration of (i) legislation to implement an annual percentage rate cap for certain consumer loans and (ii) predatory "rent-a-bank" schemes.
As previously covered, at a hearing on February 5, 2020, the HFS considered testimony on "The Veterans and Consumers Fair Credit Act (H.R. 5050)." H.R. 5050 would implement a usury APR cap for certain consumer loans (e.g., payday loans and car-title loans). Specifically, the bill would (i) extend the current 36-percent cap protections to all consumers, including veterans and their families, (ii) create penalties to cap violations, and (iii) allow for civil court and state Attorneys General enforcement, without "preempt[ing] stricter state laws." At the hearing, the Committee considered testimony on "rent-a-bank" schemes.
Further, in late 2019, the OCC and FDIC proposed rules (see here and here) that would (i) amend regulations concerning interest rates which banks may charge their customers and (ii) clarify the effect of a transfer on a loan's valid interest rate. The controversial proposed rules are intended to address uncertainty raised by the U.S. Court of Appeals for the Second Circuit decision in Madden v. Midland Funding, LLC.
Commentary
Online lending technology platforms are at the forefront of financial innovation. Indeed, many online lenders provide access to much-needed capital that might otherwise be unavailable from brick and mortar institutions. They offer essential fintech services to traditional lenders and, as part of that relationship, receive considerable oversight from federal banking authorities, as well as from their bank partners. Reports regarding investigations from state Attorneys General and other consumer protection agencies is not surprising, especially in light of the 22-state Attorney General letter to the FDIC and OCC asserting that these fintech companies are, in fact, the “true lenders” in these relationships. At least one state Attorney General has issued multiple civil investigative demands in this space, and more state Attorneys General are likely to open inquiries. In light of these developments, traditional banks and their fintech partners should take steps to ensure that they are armed against “true lender” challenges by state Attorneys General.