Affairs of State: Chime's License Push, Iowa Usury Case, Afterpay Quits New Mexico, EWA In Arizona
Affairs of State: Chime's License Push, Iowa Usury Case, Afterpay Quits New Mexico, EWA In Arizona
Also: Metropolitan Quits Crypto, City National's Redlining Settlement
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Metropolitan Quits Crypto
As first reported in late December here by Fintech Business Weekly, Metropolitan Commercial Bank has now confirmed it will stop working with crypto companies.
Per last Monday’s press release on the matter, Metropolitan
“announced that it will fully exit the crypto-asset related vertical. This decision follows a careful review by the Board of Directors and management and reflects recent developments in the crypto-asset industry, material changes in the regulatory environment regarding banks’ involvement in crypto-asset related businesses, and a strategic assessment of the business case for MCB’s further involvement at this time.
The Company expects minimal financial impact from the exit of this vertical. MCB currently has four active institutional crypto-asset related clients that in the aggregate currently account for approximately 1.5% of total revenues and 6% of total deposits. MCB’s relationships with these clients are limited to providing debit card, payment and account services.”
While Metropolitan’s statement attempts to downplay the impact of its decision to stop serving crypto companies, including by flagging that crypto companies only currently account for 6% of deposits, this belies the scope of exposure Metropolitan has historically had to the sector.
As recently as Q2 2022, a full fifth of the bank’s deposits came from crypto-related companies — that has only dropped to the 6% cited in the press release as a result of the ongoing rout in crypto markets and loss of confidence in many crypto companies, which has led to customers pulling assets from them, driving the corresponding drop in deposits at Metropolitan.
DOJ Reaches Record $31 Million Redlining Settlement with City National
Last week, the Department of Justice touted its “largest ever” redlining settlement — $31 million — in an agreement reached with City National Bank.
The DOJ’s argument was pretty straightforward:
City National had 37 bank branches in LA during the time period in question, but only three of these were in majority Black/Hispanic neighborhoods — despite the fact that over half of census tracts in LA county are majority Black/Hispanic.
The bank relied on in-branch “relationship managers” to drive mortgage applications, typically from its existing (mostly white) customers, instead of marketing its products in Black/Hispanic areas.
The bank’s “internal fair-lending oversight, policies, and procedures were inadequate to ensure that the Bank provided equal access to credit to residents of majority-Black and Hispanic neighborhoods,” and, despite internal reports as far back as 2016 of its high and increasing fair lending risk, the bank “took no meaningful action” to address the problems.
The results are stark. Of 8,593 HMDA-reportable mortgage applications City National received from 2017 through 2020, just eight percent came from majority Black and Hispanic census tracts. By comparison, “peer” banks generated 46% of their mortgage loan applications — more than 6x the number — from majority Black/Hispanic census tracts during the same period.
Even when City National originated loans to borrowers in majority Black/Hispanic census tracts, those loans went disproportionately to white borrowers.
The DOJ analysis found that “[b]etween 2017 and 2020, City National originated only 113 loans to Black or Hispanic residents of majority-Black and Hispanic tracts, while making 176 loans to white residents of those tracts.”
Per the consent order, City National must open one new branch in a majority Black/Hispanic neighborhood and “[i]nvest at least $29.5 million in a loan subsidy fund for residents of majority-Black and Hispanic neighborhoods in Los Angeles County; at least $500,000 for advertising and outreach targeted toward the residents of these neighborhoods; at least $500,000 for a consumer financial education program to help increase access to credit for residents; and at least $750,000 for development of community partnerships to provide services that increase access to residential mortgage credit.”
In 2021, City National recorded $487 million in income, per its call report filings — or about $1.3 million per day. The headline $31 million settlement amounts to less than a month’s worth of profit, which isn’t nothing, but hardly seems significant enough to change how many banks think about this type of penalty: just another cost of doing business.
Chime Is Quietly Securing State Licenses. Is A Push Into Lending (Finally) Next?
Sometime late last April, Chime, the largest US neobank by number of users, made a minor tweak to the disclosures on its site that would’ve gone unnoticed by all but the most eagle-eyed observer — it added the following to the footer of its website: “Chime Capital, LLC, Nationwide Multistate Licensing System ("NMLS") ID 2316451.”
Per Chime’s website and its NMLS records, Chime Capital, LLC, holds the following state licenses, first granted at the dates noted:
Arizona Collection Agency License (8/5/2022)
Arizona Consumer Lender License (8/5/2022)
Idaho Regulated Lender License (8/2/2022)
Kansas Supervised Loan License (10/3/2022)
New Hampshire Small Loan Lender License (10/24/2022)
Oklahoma Credit Services Organization License (5/23/2022)
Pennsylvania Credit Services Loan Broker License (4/15/2022)
Texas Regulated Lender License (10/18/2021)
Utah Registered as a Collection Agency (4/4/2022)
Wisconsin Registered under Consumer Act (date unknown)
The exact activities permitted by each license above vary — some are related to directly issuing loans, while others govern brokering loans, servicing/collecting on consumer debt, or credit repair/credit building.
However, read holistically and in combination with Chime’s existing products, which include enabling qualifying users to overdraft up to $200 and its credit builder product, it’s a reasonable (if speculative) conclusion that these licenses suggest Chime is gearing up to offer additional credit products to its users.
Representatives for Chime did not respond to a request for comment on the matter.
Iowa’s Quirky Usury Case
Generally speaking, chartered banks have the right to lend nationally and can “export” the maximum interest rate of their “home state,” as they (again, generally) enjoy the right to preempt other states’ laws on the matter.
The ability to lend nationally without obtaining separate lending licenses in each state is a major reason why nonbank/fintech lenders tend to partner with banks on consumer lending programs. Obtaining and managing the necessary lending licenses for each state is complex and time consuming.
Further, permissible product structures — generally minimum/maximum loan amounts and legal interest rates — vary state to state. This results in all sorts of headaches, as a nonbank lender is, functionally, operating somewhat distinct businesses in each state — different amounts, interest rates, loan agreements, servicing and collections requirements, etc.
The ability to export interest rates particularly appeals to a smaller set of lenders — those looking to originate credit at rates that exceed states’ usury cap. Note that while people often think about a “bright line” at 36% APR, many states have caps that are lower than this.
The practice of nonbank and fintech lenders partnering with banks (or “rent-a-bank” / “rent-a-charter,” depending on your view) has generated plenty of scrutiny and legal challenges over the years — particularly for lenders offering more expensive forms of credit (if you’re curious about some of the legal background around bank/fintech lending partnerships, including “true lender” and “valid when made,” check out this Congressional Research Service report and this post from the University of Chicago Law Review.)
A recent case in Iowa illustrates the incredibly complex intersection of federal and state banking law.
In this case, the Iowa Attorney General took issue with a buy now, pay later product, EasyPay, which partners with Utah-based Transportation Alliance Bank (TAB) to originate loans up to $5,000.
EasyPay offers a “promotion,” in which borrowers pay a maximum finance charge of $40 — if they pay off their balance in full within 90 days. If borrowers failed to pay off in full within 90 days, interest at rates up to 188.9% APR would apply retroactively to the date of origination.
But, Iowa has a state usury cap of 21%.
As mentioned above, typically, an out-of-state bank would be entitled to preempt Iowa’s cap and follow the usury ceiling of its home state. Transportation Alliance Bank is based in Utah — which has no usury cap.
However, Iowa chose to opt out of the federal Depository Institutions Deregulation and Monetary Control Act of 1980 — the only state to do so (though Puerto Rico also opted out.)
The case against TAB reaffirms Iowa’s interpretation that its opt out from 1980’s DIDMCA means that state-chartered banks in other jurisdictions don’t enjoy the protection to export rates of their home state.
As a result of the Iowa AG’s suit, TAB ceased making new loans in the state and agreed to compensate borrowers for interest they paid above the 21% state threshold.
The takeaway here? Nonbank lenders that partner with a state-chartered bank and originate loans at rates above 21% are likely to be in violation of Iowa’s usury cap, based on how the state’s attorney general is interpreting and applying its opt out from DIDMCA. Notably, this case wasn’t about whether EasyPay or TAB was the “true lender,” but rather hinged on the right of out-of-state state-chartered banks to preempt state interest rate limits.
Afterpay Quits New Mexico On State Late Fee Cap
New Mexico House Bill 132, which amends the New Mexico Small Loan Act and the New Mexico Installment Act, went into effect with the start of the new year. The amendment reduced the maximum permissible interest rate on small loans from 175% to 36% and limits penalties for late payments within 10 days to $0.05 per $1 of the total installment price.
While buy now, pay later lenders weren’t the intended target of the legislation, BNPL lender Afterpay, owned by Block, chose to exit the state as a result of the legislation. While pay-in-four plans with Afterpay carry no interest charges, the company charges late fees that are capped at 25% of the purchase amount.
That means without New Mexico’s recently passed legislation, late fees on a $100 purchase could reach as much as $25 — with the new cap, late fees would be limited to $5.
Afterpay’s decision to leave the state seems to be a reflection of the reduced profitability of operating, given the fee cap — and also an implicit admission that it depends on borrowers not paying on time to make its business model work.
Earned Wage Access Isn’t A Loan, Arizona AG Says
Debate about whether or not earned wage access (EWA) products are “loans” or “credit” — and whether or not state and federal laws, like TILA Reg Z, should apply — continue to percolate.
While there is general agreement that the product is a less expensive borrowing solution than alternatives like payday loans, which often cost around $15 per $100 borrowed, or bank overdrafts, which can quickly snowball, some legislators, regulators, and consumer advocates have bristled at their lack of consumer disclosures and protections that would typically accompany credit products.
That some consumers engage in “sustained use,” in which they advance large portions of their paycheck or do so in multiple pay cycles in a row, has contributed to criticism. EWA providers that charge fees and “faux” EWA providers, which don’t integrate with companies’ payroll and attendance systems, have also been targets of criticism.
Now, in Arizona at least, the state’s attorney general has attempt to provide additional clarity. In an opinion issued last month, the attorney general specified that EWA products that are non-recourse and non-interest bearing wouldn’t be considered “consumer loans” under state law — though EWA providers are permitted to charge certain fees.
Per a statement accompanying the publication of the AG’s opinion:
“[A]n EWA product that is fully non-recourse represents a payment of wages already earned by the employee and is, therefore, not a “consumer loan” under § 6-601(7) because the EWA product does not allow recourse against the employee in the event the provider is unable to recoup all or some portion of the advance. An EWA product is fully non-recourse where the provider obtains no legal or contractual right to repayment against the employee, does not engage in any debt collection activities with regard to any unpaid balance, does not sell or assign any unpaid balance to a third party, and does not report non-payment to any consumer credit reporting agency.
Second, and independently, an EWA product is not a “consumer loan” under § 6-601(7) so long as the provider does not impose a “finance charge,” as that term is defined in A.R.S. § 6-601(11). An EWA product provider is permitted, however, to impose certain fees listed in A.R.S. § 6-635 without the EWA product being considered a “consumer loan” because the definition of “finance charge” in § 6-601(11) excludes “other fees allowed pursuant to section 6-635.””
More Fintech Business Weekly
JPMorgan Bought a Fraud. How Many More Are Lurking Out There?
Sam Bankman-Fried Launched a Substack About His (alleged!) Fraud.
Other Good Reads
The ‘Buy Now, Pay Later’ Bubble Is About To Burst (The Atlantic)
Auto Lending: Where Are We And Where Are We Going? (Fintech Takes)
Do Crypto Prices Actually Mean Anything? (Harvard Business Review)
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