Katers & Granitz and its California partners have launched an investigation in predatory loan schemes affecting consumers in the Golden State. We believe these lenders are offering unconscionable loans to working and military families throughout the state and are conspiring to violate the recent interest rate caps scheduled to take effect in January 2020.
Payday Loans – Curse or Blessing?
If you have poor credit and need emergency cash, payday loans may seem like a blessing. Banks have historically done a terrible job serving the credit needs of poor and working families. For millions of Californians, payday lending fills an important need in the time of crisis.
Unfortunately, those loans come with a huge price. Of the three lenders we are investigating, Curo reportedly charges an APR (annual percentage rate) of 131% for a $5,000 loan. That’s actually cheap compared to Elevate Credit (up to 225%) and Enova International (up to 191%).
Another consumer lender, Opploans, is making loans at an APR of 160% although it is unclear if they are lending directly or through a partner bank.
Payday and high interest consumer loans may fill a need for someone who needs to make emergency repairs to an automobile or purchase life saving medicine for a sick child. But the cost of that credit - interest rates and fees - are clearly predatory.
Depending on where you live in the United States, there is virtually no regulation of consumer loans. Borrow $500 and you may have to pay back more than $2000 in just 12 months! We found one complaint from a California borrower to the Consumer Finance Protection Bureau that said,
“In 2014, I took out a $5,000 personal loan with Cash Call, Inc. The terms of the loan are egregious and predatory. My annual percentage rate is 116%. The cost of my loan, according to my contract is $35,000 and the total cost, if I make 84 monthly payments (7 years) according to schedule, will be $40,000. Currently (after 2 years of payments) less than $3.00 per month is applied toward payment.”
Just think, if the interest was at 225% (like some consumer lenders charge), the $5000 personal loan would have ballooned to $80,000.00 in 84 months!
Borrow from a short term lender and the typical result is a huge financial headache. If you don’t pay off the loan immediately, borrowers become trapped in a deepening cycle of the need for more high interest borrowing, overdraft charges, car repossession, utility shutoffs, difficulty affording health care, and ultimately bankruptcy.
Many states have stepped into the fray by placing restrictions on consumer and other payday lenders. California was surprisingly one of the last to regulate interest rates on these loans.
California AB 539 – Usury Rates Prohibited
On October 10, 2019, California Governor Gavin Newsom signed into law Assembly Bill 539. That law makes important changes in the state’s consumer finance laws.
The new law protects consumers in several ways:
- caps interest rates at 36% per year plus the fed fund rate (currently 2.5%)
- limits the terms of consumer loans ($2,500 - $10,000) to a minimum loan term of 12 months and maximum loan of 5 years (This stops lenders from spreading loans over an extended number of years to hide the true cost.)
- prohibits any prepayment penalties
We aren’t thrilled with the new bill but it certainly goes along way to protecting vulnerable consumers such as military families and single parent working class families who struggle from paycheck to paycheck.
The law’s sponsor was Assemblywoman Monique Limon of Santa Barbara. She heralded the new law as an important pro consumer measure. It certainly is a step in the right direction but it has loopholes.
One of the biggest loopholes is the failure of the bill to fully regulate fees and add-on charges. Some add-ons such as credit insurance can add a great deal of expense to the loan yet aren’t reflected in the annual percentage rate (APR). That is misleading to consumers trying to shop for the best rate.
According to a recent press report, “the three lenders who offer these lower interest rates are not entirely honest with the borrowers… They engage in a practice known as ‘loan packing,’ that is, they use undisclosed or deceptive practices to increase their profits by adding on ‘products’ that are of little value to the customer, but create large amounts of revenue to the lender, that more than make up for the lost interest.”
A lawyer quoted in the press report above says most of Assemblywoman Limon’s campaign contributions this year came from those three consumer lenders. Is she really helping consumers or just helping one group of loan sharks push others out?
Preemption and High Interest Payday Lenders
The biggest loophole is one that California and other states can’t easily fix. National banks are exempt from state regulation on their interest rates. The legal term for that is called “preemption.” Although credit card rates are regulated, the states can’t do much to control what national banks charge on small consumer loans.
It appears that the payday lenders are already scheming to get around the new law. A law that hasn’t even gone into effect yet!
Rent-a-Bank Schemes
How do payday lenders think they can do an end run around California regulators? Through a scheme we call rent-a-bank. In fact, some are already doing it. And that is what the consumer protection lawyers at Katers & Granitz are investigating.
The three big consumer lenders we are investigating, Elevate Credit Inc., Enova International Inc. and Curo Group Holdings Corp., are already scheming on ways to evade the new law. It certainly appears they intend on renting the charters of certain willing national banks to do an end run around the new interest rate caps.
CURO Group Holdings Corp.
CURO Group Holdings claims it is “Powering Innovation for Underbanked Consumers.” We think they are fleecing the working poor with unconscionable interest rates designed to line the pockets of their shareholders.
CURO Group currently offers both short-term and long-term payday loans in California
through its Speedy Cash brand. The company recently discussed plans to evade the new law, noting discussions with the national bank MetaBank. In an earnings call with investors and stockbrokers, CURO praised the economics of the new arrangement
“In terms of regulation at the state level in California, we expect a new law . . . [to make] our current installment products no longer viable … [W]e continue to talk to Meta[Bank] and we continue to talk to other banks about partnership opportunities… I think we feel very good about being able to find products and partnerships that will serve our, the customer base in California that wants this longer, longer term, larger installment loan or possibly as a line of credit product … And I think from a margin standpoint the bank partnerships are great. You have to sacrifice a little bit of the economics there because you have a, you have a bank partner there that’s going to need a good rev share … And I think . . . with bank partnership opportunities we feel . . . we’ve got a good, a really good opportunity to do that.”
In essence, CURO Group plans to buy or rent the bank’s charter so as to enjoy its preemption rights. Even though the California legislature expressly outlawed payday lenders from offering usurious interest rates, CURO brazenly says it will “partner” with banks to evade the law.
We are interested to see how the Office of the Comptroller of the Currency will react. The OCC regulates national banks. Former Comptroller John Hawke Jr said in a speech that national banks cannot treat their preemption rights like “a piece of disposable property that a bank may rent out to a third party that is not a national bank.” That speech was 17 years ago and national politics have changed drastically since then.
An OCC policy statement from 2018 suggests that the agency still frowns on banks that seek to rent their charters to companies seeking to evade state consumer finance laws. We shall soon see.
CURO says it is working with MetaBank, a bank that has had its own fair share of problems. The former Office of Thrift Supervision issued a cease and desist order against the MetaBank in 2011 and ordered the bank to cease participating in “unfair and deceptive acts or practices” and from deceptive advertising.
Elevate Credit Inc
Elevate Credit is another consumer lender already doing business in California. It operates under the brand Rise. We know from other states that regulate interest rates that Elevate has partnered with FinWise Bank to originate loans at rates of 99-149%. For its Elastic brand consumer loan product, the lender partnered with Republic Bank.
In a July earnings call, Elevate discussed with investors how it planned on skirting the California law:
“[Q:] So what does [the new California law] mean for Elevate?”
“[A:] [W]e expect to be able to continue to serve California consumers via bank sponsors that are not subject to the same proposed state level rate limitations… [W]e are confident that we can make that transition… And the effective yield that we are looking at on the product would be very similar to what we have on the market today. So we think the impact would be minimal and this transition would be pretty seamless.
“Realistically, we will probably use a new bank to originate as we transition into California for Rise. It will be probably different than FinWise. So that will add to the diversification.”
Enova International, Inc
Enova International claims it is “Helping hardworking people get access to fast, trustworthy credit.” Like the other two payday lenders, it is already doing business in California.
The company reportedly has two long-term payday loan products in California. NetCredit
offers loans of $2,500 to $10,000 at 34% to 155% APR. CashNetUSA offers, in addition to short-term payday loans, long-term payday loans in California at rates of 129% to 191% for a $2,600 to $3,500 loan.
The company has tried rent-a-bank schemes in other states and evidently intends on doing so in California.
“[W]e will likely convert our near-prime product [NetCredit] to a bank-partner program, which will allow us to continue to operate in California at similar rates to what we charge today… There’s no reason why we wouldn't be able to replace our California business with a bank program.”
Katers & Granitz Investigates High Interest Consumer and Payday Lenders Schemes
How the Office of the Comptroller of the Currency, the FDIC or the Federal Reserve will react to these planned rent-a-banks schemes remains to be seen. We are looking for holders of very high interest loans with Elevate Credit Inc., Enova International Inc. and Curo Group Holdings Corp to write us and share their experiences. This includes anyone with loans branded as Speedy Cash, Rise, Elastic, NetCredit and CashNetUSA as well as high interest rate loans from Opploans. (We define high interest rate loans as those with an APR of 100% or more.)
Our plan is to see if these companies bring their loans into compliance after the beginning of the year or flout the law as they have suggested.
Even if the feds don’t take action – or if the feds say the arrangement is legal - all is not lost. The courts in California have previously ruled that even in the absence of an interest rate cap, courts can take action if the interest rate or terms are unconscionable.
In 2018, the California Supreme Court said “Unconscionability is a flexible doctrine. It is meant to ensure that in circumstances indicating an absence of meaningful choice, contracts do not specify terms that are ‘overly harsh,’ ‘unduly oppressive,’ or ‘so one-sided as to shock the conscience’... California courts have the authority to decide whether contract provisions, including interest rates, are unconscionable. Our respect for the Legislature's prerogative to shape economic policy through legislation is why we have kept the doctrine relatively narrow, and are careful to observe its nuances. But this is no reason for courts to absent themselves from the picture entirely.”
As originally drafted, California’s AB 539 legislation attempted to say that rates couldn’t be used to conclude that a loan was usurious or unconscionable. That language was stripped from the legislation. This is great news for consumers and means we may still be able to stop really egregious loans no matter what the feds or payday lenders say.
At this point we anticipate a class action on behalf of consumers and borrowers. In order to file a lawsuit next year, we are looking for victims of these predatory consumer loans now.
Here are the qualifications:
- Loan size of between $2,500 and $10,000
- Open loan with terms of between 12 months and 5 years
- Annual interest rates (APR) of 100% or more.
After the first of the year, we will see what happens with interest rates and will expand our investigation to include anyone with a nonbank loan with an interest rate of 40% or more.
We are also interested in hearing from anyone scammed by worthless credit insurance and other add-on products or fees.
Please write to us at [hidden email]. We can’t respond to everyone and likely won’t respond before the beginning of the year. The best facts lead to the best court outcomes. Although we intend on bringing class actions to benefit all consumers against high interest consumer lenders, we need to find the best stories and the right class representatives.
Why should you bother? Courts typically award the class representatives up to $10,000 for their time and service although we can make no guarantee what a court might do. Anywhere in California, if you have a pay day lending or consumer finance horror story, please share it with us. Our lender liability lawyers have been instrumental in having banks and lenders fined $17 billion. That’s $17,000,000,000.00.
*We apologize that we cannot accept phone calls. Share your story by email [hidden email] or use our online report form. We will look at everyone! If you have your loan agreement and a scanner, please send us a scanned copy along too.
Most consumer loan agreements have mandatory arbitration agreements making class action cases difficult. We need the loan agreements to determine whether or not borrowers can even sue.