California lawmakers urge FDIC to rein in bank partnerships

Four Democratic members of the California state legislature recently sent a letter to the Federal Deposit Insurance Corporation (FDIC) urging the agency to take action against FDIC-supervised banks that partner with non-bank lenders to originate high-cost installment loans.

Two of the letter’s authors, California Senator Monique Limon and Assemblymember Tim Grayson, were also sponsors of Assembly Bill AB 539, passed in 2019, which caps the annual interest rate at 36% plus the federal funds rate for consumer loans of at least $2,500 but less than $10,000 made by lenders licensed under the California Financing Law.  Despite California’s usury law, FDIC-supervised banks have the ability to export the interest rate of their home state.  According to the letter, at least nine high-cost lenders have partnered with six FDIC-supervised banks to originate consumer loans with interest rates that would exceed states’ interest rate caps.  In their letter, the legislators urge the FDIC to “crack down on these schemes” to “evade state laws that protect consumers from unaffordable interest rates.”  A coalition of consumer advocacy groups raised similar concerns in a letter to the FDIC in February.

The letter explains that although states have tools for going after these lending arrangements, such tools are more costly to employ and less likely to be effective than typical enforcement authorities provided to state financial regulators.  One such tool is the “true…