Potential Class Action Argues High APR "Rent-a-Bank" Scheme Violates RICO
Bunq Withdraws OCC Charter Application, Former FDIC Chief Innovation Officer Embellished Resume
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Potential Class Action Argues High APR "Rent-a-Bank" Scheme Violates RICO
Late last month, Missouri-based Lead Bank and its co-defendant Hyphen, LLC, sought to dismiss a potential class action case alleging the two operated a “rent a bank” scheme to originate small loans to Georgia consumers at interest rates in violation of the state’s usury cap.
Georgia’s Installment Loan Act requires licensure and sets a maximum interest rate of 10% for loans up to $3,000.
In response to the use of the so-called “rent a bank” strategy by payday lenders in the early 2000s, Georgia passed its Payday Lending Act, which prohibits payday lending at rates exceeding 16% APR and sought to prohibit lenders from leveraging bank partnerships to evade the cap by explicitly extending the ban to cover transactions in which “a de facto lender purports to act as the agent for an exempt entity.”
The 2004 law defined a third-party as being the “de facto lender” when “the entire circumstances of the transaction show that the purported agent holds, acquires, or maintains a predominant economic interest in the revenues generated by the loan.”
While Georgia’s law dates to 2004, other states have become increasingly active in recent years in pushing back on lenders that partner with banks to originate loans in excess of their local usury caps: Iowa sued a BNPL lender that originates loans through TAB; California is embroiled in a long-running case with high-APR lender OppFi, which partners with FinWise; and Washington, DC, has pursued actions against both EasyPay and OppFi.
Jurisdictions have also been active in making changes designed to discourage using such partnerships to originate loans at rates above local usury caps through legislative and regulatory processes.
Colorado recently passed a bill opting out of a provision 1980’s DIDMCA, which casts doubt on out-of-state state-chartered banks’ ability to preempt Colorado state law, including its interest rate cap. Whether or not the maneuver blocks fintech-bank partnerships from lending into the state may hinge of the definition of where a loan facilitated online is physically “made” — in the state the partner bank is based in or the state in which the borrower physically resides.
Some jurisdictions are adding “anti-evasion” measures, which seek to define who the “true lender” in a bank-fintech partnership is or where a loan is “made” in local law.
For instance, DC’s proposed measure would opt it out of DIDMCA, define a a loan as being “made in” the District if the borrower is a resident at the time they enter into the transaction, and that the definition of a “lender” includes (emphasis added):
any person that offers, makes, arranges, or facilitates a loan, or acts as an agent for a third party in making or servicing a loan, “including any person engaged in a transaction that is in substance a disguised loan or a subterfuge for the purpose of avoiding this chapter, regardless of whether or not the entity or person is subject to licensing”, and that (a) holds “directly or indirectly, the whole, predominant, or partial economic interest, risk or reward” in a loan, (b) markets or brokers the loan and has a right to acquire an interest in the loan, or, (c) based on the “totality of the circumstances”, should be considered a lender.
It’s worth noting DC’s proposed measure contemplates a non-bank third-party that holds any economic interest in a loan as being the “lender” for purposes of local licensing requirements and rate cap restrictions.
In fintech-bank partnerships, once a bank has originated a loan, its fintech partner typically purchases a nearly total interest in the loan, though bank partners increasingly will hold a 5-10% stake to support their position as the “true lender.”
In the Georgia case, the plaintiff argues that Hyphen, LLC, doing business under the name Helix Financial, is not merely a “brand” of Lead Bank, as it claims.
Rather, the plaintiff argues, the arrangement with Lead Bank is a mere façade designed to enable Hyphen to originate loans at rates exceeding 400% APR to Georgia consumers — without its own license to do so and in violation of state interest rate caps.
In support of its argument that Hyphen and not Lead Bank is the true lender, the plaintiff states that:
Hyphen is responsible for “all material aspects of these illegal transactions,” including marketing and lead generation
Hyphen sets the lending criteria and makes lending decisions
Hyphen services the loans
Despite apparently being owned and operated by Hyphen, LLC, current and previous iterations of the Helix Financial website make no reference to Hyphen, instead making it appear as if the site is owned and operated by whichever partner bank Helix listed at the time.
According to the plaintiff (emphasis added), “the entire circumstances of the loan transactions show that Helix is the true issuer and servicer of the loan, and that it holds, acquires, or maintains a predominant economic interest in the revenues generated by the loans.”
While the plaintiff’s case convincingly argues that Hyphen, doing business as Helix, is responsible for marketing, underwriting, originating, and servicing the loans, it does not present evidence that any interest in the loan itself is transferred from Lead to the company after origination.
The case further argues that Hyphen/Helix and Lead collectively operated as an “enterprise” to profit from the collection of unlawful debt, in violation of federal and Georgia RICO laws.
In their motion to dismiss, Lead and Hyphen put forth a fairly straightforward argument:
Lead Bank is named in the loan agreement and issued the loan in question
Lead Bank is a state-chartered bank insured by the FDIC
As such, Lead Bank is undisputedly exempt from Georgia state usury law
The loan agreement specifies that Missouri law, not Georgia, governs the agreement
The loan agreement includes an assignment clause, allowing Lead to assign or transfer the agreement or any rights thereunder
The loan agreement includes a servicing notice that specified Hyphen as the servicer of the loan on behalf of Lead Bank
The defendants’ motion argues that, because the loan was made by Lead Bank and was valid at the time it was originated, any subsequent assignment does not make it usurious, citing Section 27 of the Federal Deposit Insurance Act:
(e) Determination of interest permissible under section 27. Whether interest on a loan is permissible under section 27 of the Federal Deposit Insurance Act is determined as of the date the loan was made. Interest on a loan that is permissible under section 27 of the Federal Deposit Insurance Act shall not be affected by a change in State law, a change in the relevant commercial paper rate after the loan was made, or the sale, assignment, or other transfer of the loan, in whole or in part.
The motion to dismiss further argues the plaintiff did not establish the facts necessary to sustain the RICO allegations, as the plaintiff would need to establish that both Lead Bank and Hyphen conspired to collect on an “unlawful debt,” but that the plaintiff did not bring a claim that Lead Bank violated Georgia usury laws — only that Hyphen did so.
Thus Lead Bank and Hyphen argue the RICO allegations against Lead fail, because there is no allegation that Lead itself violated Georgia usury law. Plaintiff’s claim against Hyphen for violating Georgia usury law should fail, the defendants argue, because the loan agreement was valid when made.
Because the loan was valid at the time it was made and there is no allegation that Lead violated Georgia usury law, the plaintiff fails to establish an “enterprise,” which is necessary to sustain the state and federal RICO claims.
Lead and Hyphen’s filings asking for dismissal do not specify to what extent, if any, Lead Bank maintained an ongoing economic interest in the loan post-origination vs. selling a portion or the entirety of the economic interest in the loan to Hyphen.
While lender-bank partnerships are a common structure, including by popular fintech lenders like Affirm and Upstart, there are unusual elements to how Hyphen, which currently operates under the “brands” Vault and Atlas Personal Finance by partnering with Missouri-based Bank of Orrick, structures these arrangements.
Typically, when there is a customer-facing third-party, it is clearly distinguished as a separate legal entity from any underlying bank partner(s). For instance, OppLoans is clearly a separate entity from its partners, and ostensibly acts as a third-party underwriting and servicing platform for its bank partners.
By contrast, at the time Hyphen partnered with Lead and in its current partnership with Bank of Orrick, customer-facing materials make virtually no mention of the existence of Hyphen and its role as a third-party service provider to its bank partners.
This isn’t necessarily a problem, per se, but is atypical for bank-lender partnerships in which the non-bank company acquires the majority economic interest in the loans post-origination. If Hyphen were merely providing a technology platform for loan origination and servicing, it’s not clear why separate “brand” websites would need to be created for it to do so.
Lead Bank and Hyphen’s motion to dismiss was filed on January 29, 2024 and has yet to be decided.
Also on the 29th, Georgia’s Department of Banking and Finance filed a cease and desist order barring Hyphen doing business as Helix Financial from engaging in acts that violate the Georgia Installment Lenders Act, stating that the department “has evidence that Helix Financial violated the GILA… by engaging in the business of making installment loans to Georgia consumers without a valid license or pursuant to an applicable exemption.” Hyphen, Bank of Orrick, and Kendall Bank also face a civil suit in Illinois, alleging violations of the Truth in Lending Act.
Despite the cease and desist order, as of this morning, Hyphen doing business as Helix, now operating through Bank of Orrick, still says that it serves borrowers residing in the state of Georgia.
FDIC’s Former Chief Innovation Officer Embellished Resume
In the latest embarrassing revelation, The Information is reporting the FDIC’s one-time Chief Innovation Officer, Sultan Meghji, had a history of claiming dubious and exaggerated accomplishments prior to his employment at the agency.
The report comes after earlier revelations that fellow bank regulator the OCC hired its first Chief Fintech Officer, despite easily disprovable claims in his resume.
When Meghji was appointed as the FDIC’s first Chief Innovation Officer in 2021, he was described at the time by then-Chair Jelena McWilliams as a “recognized expert in financial technology.”
But Meghji lasted just 12 months in the role and penned a scathing op-ed after his departure, describing the federal government as “both hesitant and hostile to technological change.” Meghji claimed to find “barrier to innovation” on “virtually every front” at the FDIC.
Meghji’s purported experience in financial technology included creating a core banking platform, Fineuron, which he sold to Neocova, a startup in the space. But, according to The Information’s reporting, the software and Neocova failed to deliver on its promises, with investors and customers like BankProv and Coastal Community shocked to discover the functionality they were promised didn’t actually exist.
Neocova, since rebranded as Revio, and Meghji ultimately parted ways after a board investigation into the company’s spending, which included travel, expensive custom furniture, crates of bourbon, and a paid advisory board staffed by longtime associates of Meghji.
Per The Information, Meghji also exaggerated claims about an aid project in Africa, saying he helped bring banking services to more than 600,000 in Tanzania, despite the project never actually going beyond a small trial involving about 400 users. Meghji also has claimed to run a nonprofit foundation setup to commemorate the death of his father, despite no evidence the organization ever actually existed.
While Meghji’s exaggerations fall far short of the outright falsehoods of the OCC’s one-time Chief Fintech Officer, the news adds to a perception of questionable judgment when it comes to bank regulators’ hiring practices, especially for so-called “innovation” roles — at the same time that regulators have stepped up their scrutiny and enforcement related to banks’ partnerships with fintech firms.
Bunq Withdraws De Novo Application, Plans To Refile
Dutch neobank bunq, which is a fully licensed bank in its home country of the Netherlands, has withdrawn its application for a de novo national bank charter approximately 300 days after it was initially filed.
According to comments a bunq spokesperson made to a trade publication, the withdrawal was “merely procedural” and stemmed from a difference of views between bunq’s home country regulator, the DNB, and the US OCC and FDIC.
Bunq said that it plans to “speedily” reapply with the OCC. Its application for deposit insurance with the FDIC remains “pending.”
While bunq has minimized the withdrawal of its application, recent history suggests it is likely to have an uphill battle at winning approval for a de novo charter.
Fellow neobank Monzo was unsuccessful in seeking its own bank charter and ultimately decided to partner with Sutton Bank to launch in the US. Revolut claimed it was applying for a California state charter, but never actually did so, and operates in the US through partner Metropolitan Commercial Bank.
Given the extremely limited number of de novo applications and the low success rate since 2008, the odds are not in bunq’s favor.
The OCC’s experience with Varo, which secured a de novo charter from the national bank regulator, may make it think twice before granting charters to similarly positioned applicants: Varo has never turned a profit and has no clear path to do so.
While bunq recently became profitable, it did so largely thanks to rising rates on funds it holds at the central bank — casting doubt on its resilience should rates decline in the future.
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