Today’s WSJ talks about how some non-bank lenders are circumventing local state laws on usury caps by placing loans in states with limited controls, such as Utah.
A new state law this year capped interest rates—currently at about 37% a year—for some consumer loans.
But OppLoans is charging 160% on a typical loan in California, according to its website, using a partnership with a Utah bank to continue selling in the state despite the new rules.
OppLoans isn’t the only lender charging triple-digit rates in California.
The Wall Street Journal ran 25 online searches in February within the state for loans for a financially stressed borrower.
The top results included several companies pitching consumer loans with rates over 100% to borrowers browsing from California.
This strategy appears to take advantage of a credit card industry ruling, which allows for the transportability of interest rates; however, the rates used in this situation often exceed 100%.
Due to a Federal court decision in 1978, The Marquette decision (Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp), credit card rates can be exported from one state to another based upon the location of the card issuer.
OppLoans and its partner FinWise Bank are in what is called a rent-a-bank partnership, which allows high-cost lenders to skirt interest-rate caps in dozens of states. Rent-a-bank arrangements are the focus of a fierce battle pitting state regulators and consumer advocates against the credit industry.
Here’s how they typically work: A lender such as OppLoans helps identify borrowers to whom it wants to lend at rates above what their states permit. It makes a deal with a bank in another state, where such rates are allowed to put up the money. Then the bank sells the lion’s share of the loan to the lender or a company connected to the lender.
Historically, states set their usury limits. In South Dakota, there is no cap. In Texas, the limit is 10%. This table, maintained by the Credit Union National Association, clarifies the Texas limit: “The maximum interest rate is 10% a year unless otherwise provided by law. Where no interest rate has been agreed upon, the rate is 6% per year.”
The Rent-A-Bank strategy used here appears legal, albeit shakey:
OppLoans partners with FinWise Bank, which is based in Utah, where there is no interest rate cap, to sell loans in 24 states and the District of Columbia.
The cap in the district is 24%, but the typical rate on loan sold, thereby OppLoans and FinWise, is 160%, according to OppLoans’s website.
In another case, the strategy goes off-shore:
Elevate’s Rise loans in 18 states and D.C. are originated by FinWise, according to Elevate securities filings.
The bank then sells a 96% interest in the loans to a Cayman Islands special-purpose vehicle called EF SPV Ltd., which is counted as part of Elevate for accounting purposes.
This offshore company borrows to fund the loan purchases, paying a rate at end-2019 of just over 10%, compared with the 99% to 149% it collects on the typical Rise loan, the filings show.
Remember those tribal loans, such as Great Sky?
States and lenders have been at odds over loan charges for decades. Rent-a-banks cropped up more than 15 years ago but dwindled following a clampdown by bank regulators.
After the financial crisis, some high-cost lenders instead formed partnerships with Native American tribes, which said their sovereign immunity shielded the loans from state laws.
But a number of courts questioned the legality of such “rent-a-tribe” arrangements.
There is an ugly theme here.
An FDIC spokesman declined to comment. Jonathan Gould, chief counsel at the OCC, said in a statement that “nothing in the proposal alters the OCC’s longstanding view that banks should avoid rent-a-charter relationships that facilitate predatory lending.”
Lending to high-risk segments does require a cushion. At these rates, however, people might be better off without the debt burden.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group