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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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Business

21 Workers Test Positive for Coronavirus at Rock n Roll Ralphs

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Workers protest outside Ralphs in Hollywood where 21 have tested positive for coronavirus

HOLLYWOOD (KTLA) — Workers rallied Friday outside a Ralphs store in Hollywood where 21 people have tested positive for the coronavirus.

The group called on the store to take more aggressive action when staff test positive for the virus, and to ramp up efforts to protect the grocery store employees, who are considered essential workers on the front lines of the pandemic.

They said they speak for thousands of workers who are afraid they aren’t getting enough protection as the virus continues to spread countywide, infecting more than 24,000 as of Friday.

The Ralphs at 7257 W. Sunset Blvd. has had an outbreak involving several workers who tested positive for the virus, according to the Los Angeles Department of Public Health, which lists businesses and […]

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‘Stay Put, Order In’ and Dine With Friends on Zoom, Says Mayor

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WEST HOLLYWOOD — WeHo is home to some of the best restaurants in the world and our community members are used to gathering around restaurant tables and enjoying meals together. Now, there’s an opportunity to, instead, gather around kitchen tables at home and enjoy a meal (or many!) while supporting our local restaurants.

“One of the worst things about the Safer At Home directive is being disconnected from friends, neighbors, and the city around us,” said City of West Hollywood Mayor John D’Amico. “Don’t be alone if you don’t have to be – take advantage of the technology out there and invite a friend to Zoom in for Ziti or share some Farfalle over FaceTime.”

Mealtime is a wonderful opportunity to connect with friends, family, and loved ones using virtual teleconferencing technology, while partaking in your favorite delivered or takeout food.

City Encourages Residents to Support Local Restaurants During Safer At Home Orders

Many West Hollywood restaurants remain open and are offering takeout, curbside, and delivery meals, which are sensitive to social distancing during the emergency. The City of West Hollywood and the West Hollywood Chamber of Commerce have teamed up to offer a directory of “Stay Put, Order In” eateries in West Hollywood, which is accessible by visitingwww.weho.org/coronavirus (click the “Stay Put, Order In” link!) or www.wehochamber.com/dinein. This list is updated daily.

“We need to start hanging out together, and talking, and seeing each other again. So, why not plan to #WeHoDinnerConnect this week – maybe Saturday at 8 p.m.? Or Sunday at 7 p.m.? Or even just 15 minutes of screen-to-screen gossip,” said Mayor D’Amico. “And you don’t have to cook a thing… local restaurants have meals and menus tailored to take-away choices and they’re ready to send food over to your house or make arrangements for you to pick it up.”

If picking up food, remember to wear face coverings, which are required to enter essential businesses.

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Amoeba Music Won’t Reopen Original Sunset Boulevard Store

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Amoeba Music won’t be reopening its original Sunset Boulevard store

HOLLYWOOD (TimeOut) — In a statement posted to its Instagram account on Monday, Amoeba announced that it would not be reopening its nearly two-decade-old flagship on Sunset Boulevard. Instead, the indie record shop will divert all of its resources to opening its new shop on Hollywood Boulevard, which they still hope to have ready in the fall.

“There are so many unknowns and uncertainties for a business like ours right now,” the statement reads. “The only way we can keep Amoeba Hollywood alive in the future is to make this difficult decision now.”

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It is with a very heavy heart that we announce that the massive impact from COVID-19 has forced Amoeba Hollywood to remain closed until we can hopefully move to our new location this fall. We are devastated. We know you are too. We never envisioned not being able to give the store the send-off it deserves, to give you all a chance to say goodbye. But we are facing too many mitigating circumstances. This is not the end of Amoeba! We are moving to a new location at 6200 Hollywood Blvd in the fall and we feel fortunate that this plan was set into motion long before COVID-19. There are so many unknowns and uncertainties for a business like ours right now. The only thing we do know for certain is that we intend to survive. We want to continue to be there for our amazing customers and our incredible staff in our new location long after this pandemic disappears. The only way we can keep Amoeba Hollywood alive in the future is to make this difficult decision now. Thank you ALL so much for your support during this time and over the years. We have the best customers in the world, as evidenced by the tremendous outpouring of support for our GoFundMe. Your generosity is going to help cover health care for our employees at all three stores, and generally help Amoeba continue while we all must remain closed. We miss you all and cannot wait until we can be together again. Please read our full statement online at https://amoeba.com/moveupdate

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Our original story about the store’s GoFundMe campaign appears below.

It’s become a pit stop on music-lover’s tours of Hollywood, it’s hosted concerts from Patti Smith and Paul McCartney, and it’s weathered the Great Recession and the transition from CDs to MP3s to all things streaming. But with Amoeba Music’s future more uncertain now than ever, the massive independent record store is turning to its devotees for nearly half a million dollars to try to stay afloat.

In an essay on GoFundMe, Amoeba cofounders Dave Prinz and Marc Weinstein recount […]

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