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Will Lenders Find Loopholes in California’s New Loan Interest Laws?

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by Tom Dresslar

(CalMatters) — The people of California, through their legislature and governor, just decided to end a decades-long, unbridled fleecing of millions of the state’s borrowers.

Some predatory lenders, however, may launch a scheme that could, for their companies, effectively overturn that sovereign decision.

Gov. Gavin Newsom has signed into law Assembly Bill 539 by Assemblywoman Monique Limón, Santa Barbara Democrat. The measure sets an annual interest rate cap of roughly 36% on consumer loans from $2,500 to $10,000 made by non-bank lenders.

For the prior 34 years, under state law, the sky was the limit on rates charged for such loans. Last year, 333,416 non-bank consumer loans in the $2,500 to $10,000 range had annual percentage rates of 100% or higher. That represented 40.7% of such loans. In the $2,500-$4,999 range, the triple-digit APR ratio was 55.5%.

Existing state law has permitted high-cost lenders to prey on hundreds of thousands of financially vulnerable borrowers who have few credit options. Many live in minority communities. All too often, these consumers, trapped in loans they cannot afford, stop making payments and end up even less able to obtain credit in the future.

AB 539 addresses this problem, one of the most significant market hazards California consumers face today. Even before the measure passed the Legislature, however, three lenders told investors they had an escape hatch.

The three firms are Elevate Credit, Inc., Enova International, Inc. and CURO Group Holdings Corp. The lending businesses they operate in California are called, respectively, Rise Credit, CashNet USA, and Speedy Cash.

In 2018, those lenders made a combined 24.7% of the triple-digit APR loans in the dollar range affected by AB 539.   

In late-July earnings calls with investors, the three companies made AB 539 seem like a pesky fly easily flicked away. All they have to do, the firms’ executives said, is form partnerships with out-of-state banks in lender-friendly confines and, presto, AB 539’s rate caps vanish.

Federal law makes the magic trick possible.

At the risk of getting too technical, Section 1831(d)(a) of the Federal Deposit Insurance Act allows state-chartered banks to “export” to all other states the loan rates allowed in the state where they are located. 

So if their home state’s laws have no rate restrictions, such banks can charge borrowers in other states any amount they want, regardless of limits imposed by the consumer’s state laws.  Non-bank lenders in California and other states–many of them operating online–have exploited this breach of state sovereignty. The partnerships they enter with state-chartered banks allow them to evade state regulation and interest rate limits because the bank technically originates the loans, bringing the FDIA provision into play.

However, these agreements often have turned out to be little more than legal subterfuge. In a typical case, the bank sells the loans back to its non-bank partner within a few days after originating them.

The non-bank, not the bank, retains most or all of the risk from non-payment. The bank frequently is indemnified against other losses arising from the agreement. The non-bank does all the customer acquisition, all the loan servicing, all the interaction with customers. Ask borrowers in these circumstances to identify their lender, and they will name the non-bank.

Such agreements raise serious questions about whether the bank or non-bank is the true lender. And if the non-bank is the true lender, it should not be allowed to use federal law to evade state regulation. 

Courts have ruled on both sides of the true lender question. So, while in Elevate’s July 29 earnings call one executive bragged about how the firm used a bank partnership to evade rate limits in Ohio, the arrangements are not impenetrable legal fortresses.

In New York and Colorado, officials have taken strong pro-consumer stances by proactively attacking fringe lenders’ transparent use of banks to evade their states’ laws.

One way California can fight this threat to AB 539 is to take a tough stand on the true lender issue. State officials could announce plans to adopt regulations setting criteria that determine when the bank is the true lender. They could make it known they will aggressively litigate the true lender issue.

State officials also should work with federal regulators, and regulators in states where banks form these partnerships, to stop the agreements before they happen.   

Bottom line: California’s government leaders must make every effort to stop Elevate, Enova and CURO—and their ilk—from joining with out-of-state banks to thumb their noses at California, its consumers and its democratic process.

____

Tom Dresslar is a former reporter and served as a Deputy Commissioner at the California Department of Business Oversight, the state’s regulator of financial service industries.

This article is produced as part of WeHo Daily’s partnership with CalMatters, a nonpartisan, nonprofit journalism venture committed to explaining how California’s state Capitol works and why it matters.

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TikTok Moves into New Gensler-Designed Culver City Offices

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CULVER CITY — TikTok today announced the company is moving into a brand new home… a 120,000-square foot office in Culver City. The move further deepens TikTok’s connection and commitment to the greater Los Angeles area as it continues to grow its U.S. team, including key leaders. 

The new TikTok office spans five floors, which were designed from the ground up to embody TikTok’s fun and joyful personality. Creativity is synonymous with TikTok, so having a space that inspires everyone who walks through the door was a driving force behind the move. The heart of the space is a bright pink staircase that runs through each floor and follows a bespoke mural designed by TikTok’s internal design team.

“Located between the innovative tech companies in Silicon Beach and the streaming content companies at Hayden tract, TikTok truly sits at the intersection of technology and entertainment, physically and figuratively,” said Vanessa Pappas, general manager, TikTok U.S. “While we are a global company, having a permanent office in LA speaks to our commitment to the U.S. market and deepens our bonds with the city, and the talent and companies, that call it home.” 

The new office features a fully open floor plan interspersed with conference rooms, private phone booths, a stadium-style presentation and gathering space, and terraces to support indoor-outdoor work. A TikTok content-creation studio will be completed by the summer of 2020, providing even more opportunities for immersive and entertaining videos from TikTok creators and partners. The office is also dog-friendly, allowing TikTok’s beloved canine creators to visit as well. 

The office was designed in collaboration with global architecture and design firm, Gensler. “The new TikTok LA office is the result of two creative companies out to build a space that was inclusive, collaborative, and fun,” said Chris Mitchell, Design Director, Gensler. “We hope the space gives TikTok’s employees a home to be proud of and a place to inspire more of the entertaining content the app is known for.”

As part of TikTok’s commitment to inspire and encourage a new generation to have a positive impact on the planet, the company selected a LEED Gold-certified building that exceeds California standards. The new office features design and building strategies aimed at energy and water conservation, reducing C02 emissions, and improving indoor environmental quality. 

TikTok continues to be committed to building and growing the app experience for its diverse and growing mix of users, creators, and brands. Last year, the company built out its U.S.-based leadership team with key hires across functions including product, safety, content, music, sales, and operations. TikTok now employs over 400 employees in offices across the U.S., including Los Angeles, Silicon Valley, and New York. TikTok will also continue to invest in supporting both local and national initiatives relevant to its community.

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Endangered West Hollywood Rare Plant Nursery May Survive

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WEST HOLLYWOOD (LAist) — Leon Massoth has owned and operated XOTX Tropico nursery in West Hollywood for over 30 years. A beloved West Hollywood nursery that specializes in rare species has to shut down by the end of the month, but it appears to have found a new home.

Late last year, Leon Massoth was instructed to vacate XOTX Tropico (“exotics”) nursery—a business he started over 30 years ago. The owner of the property it sat on had sold the land.

Massoth was supposed to be out by the end of December, but gave up his security deposit to stay a little longer.

“We’re severely under the gun,” he told […]

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A Slightly Unhinged Investigation Into Lisa Vanderpump Conspiracy Theories

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A Slightly Unhinged Investigation Into Lisa Vanderpump Conspiracy Theories

WEST HOLLYWOOD (Vice) — Something is going on over at Lisa Vanderpump’s famed LA restaurants.

In the last week, the star of Real Housewives of Beverly Hills, matriarch of the unswervingly-glossy-skinned narcissists on Vanderpump Rules, and business mogul has dealt with a series of unfortunate events befalling her establishments.

The rule of threes suggests that when weird things strike thrice, let alone all in the same place, it probably means something shady is happening—at least if you buy into conspiracy theories. And in the case of anything Vanderpump-related, it’s much more fun if you do. Let’s dive in!

On January 5, a Ferrari crashed into PUMP, her West Hollywood restaurant/bar known for its kind of gross food and ridiculous cocktail names […]

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