California legislators ask FDIC to cut off high-cost customer lending institutions

California legislators are asking the Federal Deposit Insurance Corp. to check collaborations in between FDIC-supervised banks and customer lending institutions they state are averting the state’s rate of interest limitations.

The company needs to “crack down on these schemes” to make sure lending institutions cannot evade California’s 36% interest rate cap on loans in between $2,500 and $10,000, 4 Democratic lawmakers composed in a letter to FDIC board members. The legislators were the authors of a 2019 state law that prohibited such loans.

“FDIC-supervised depository institutions should not be permitted to originate loans on behalf of third parties who seek to evade state laws that protect consumers from unaffordable interest rates,” the lawmakers composed in a letter recently.

Under a 2019 California law, interest rate on customer loans in between $2,500 and $10,000 are topped at 36%. But for nonbank lending institutions, bank collaborations have actually provided a method around the limitations.


The letter mirrors a demand from customer groups in February, when the FDIC’s Republican-selected chair was leaving the company and handing the reins to Acting Chairman Martin Gruenberg.

The FDIC decreased to comment Monday on the letter.

Under the collaborations, nonbank lending institutions utilize FDIC-supervised banks to make high-cost loans in California, given that banks are not bound by the 2019 law’s constraints. Critics of the collaborations call them “rent-a-bank” plans. They likewise argue that APRs on the loans, which can extend above 100%, are violent.

But the business that take part in the collaborations challenge their critics’ characterizations and state that greater rate of interest are needed to serve a riskier population that usually doesn’t receive bank loans.

The Online Lenders Alliance, which represents specific high-cost lending institutions, has pressed back versus efforts in states like New Mexico to enforce rate caps comparable to California’s, arguing those steps “harm consumers by restricting credit.”

The dispute is presently working its method through the California court system, also. Chicago-based customer lending institution OppFi is taking legal action against California’s banking commissioner, arguing that its high-cost loans need to not go through the state’s rate cap since they’re made in collaboration with Utah-based FinWise Bank.

Meanwhile, California banking commissioner Clothilde Hewlett is countersuing OppFi and looking for charges of a minimum of $100 million. In a court filing last month, the California Department of Financial Protection and Innovation, which Hewlett leads, called OppFi’s loan program an “overt attempt to evade the state interest rate cap” that “must be recognized as an illegal sham.”

The state legislators who composed the letter to the FDIC kept in mind the claim remains in its early phases and stated that quicker action is needed, given that the legal problems are most likely to take years to deal with.


A news media journalist always on the go, I've been published in major publications including VICE, The Atlantic, and TIME.

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