Category: Consumer Contracts

  • A Campaign to Opt-Out

    Posted by

    Christopher Odinet

    Following-up on my prior post, let’s talk more about what’s at stake in this little legislative kerfuffle in the Hawkeye state, as well as how consumer advocates should seize on this moment in a different way.  

    First, repealing this 521 provision in Iowa law is really all about whether states should have, to a large degree, the ability to control the interest rates charged on products and services that are offered to consumers by nonbank firms. 

    Many readers of this blog may already know this history backwards and forwards – but for those who don’t, here’s the backstory. In Marquette Nat’l Bank of Minneapolis v. First of Omaha Serv. Corp., the U.S. Supreme Court interpreted the National Bank Act as giving nationally-chartered banks the ability to charge the highest interest rate allowed in the state where the bank is located to borrowers located not only in that state, but also to borrowers located in any other state.  This means, for instance, that a national bank located in Iowa can not only charge the highest interest rate allowable in Iowa to anyone located in Iowa, but it can also charge that same rate to a borrower located in Oklahoma, Louisiana, or any other state.  Even if Louisiana, Oklahoma, or another state’s laws prohibit interest at such a rate, the loan is nevertheless free from being usurious. This concept is known as “interest rate exportation.”  

    After the 1978 decision in Marquette, there was a concern about the ability of state-chartered banks to compete with national banks. So, state legislatures started enacting “parity laws” that allowed their state banks to charge the maximum rates of interest allowable by any national bank “doing business” in that particular state. These parity laws were often even broader, granting to state chartered banks all of the incidental powers granted to national banks. In sum, the goal of these parity laws was to put state banks on equal footing with national banks, particularly when it came to usury.  Good so far?

    Ok here comes the part dealing with this shady Iowa house bill…

    In a final effort to give state-chartered banks a competitive edge, in 1980 Congress passed the Depository Institutions Deregulation and Monetary Control Act (DIDMCA).  A portion of DIDMCA, specifically section 521 (see where this is going…) granted interest rate exportation to any state-chartered bank that was federally insured (in other words, to all FDIC-insured state-chartered banks). 12 U.S.C. 1831d. This allowed a state-chartered bank to charge out-of-state borrowers the same interest rate allowable for in-state borrowers.  Thus, a state-chartered bank located in Iowa could charge an Oklahoma borrower the Iowa-allowable interest rate, even if that rate was higher than what would otherwise be legal under Oklahoma law. 

    But here’s the catch. In Section 525 of DIDMCA, Congress gave states the ability to opt-out of section 521 by enacting legislation stating the state did not want section 521 to apply. Only two jurisdictions opted out: Puerto Rico and…you guessed it…Iowa. In 1980, right after DIDMCA was passed, Iowa opted out per 1980 Iowa Acts, ch. 1156, sec. 32. To add one more bit of background, Iowa also did not enact any parity laws. In fact, a former general counsel to the Iowa Division of Banking stated in a 2002 interview that enacting such a law that delegated control over Iowa state banks to the feds would be seen as “a slap in the face” to the Iowa legislature. 

    So, there you have it. This little provision in an otherwise unrelated tax bill is to OPT INTO section 521 and thereby reverse the decision Iowa’s legislature made in 1980.

    Now you may say to yourself, why is this so bad? The bad part requires you know something about the rent-a-bank partnership model between certain state-chartered banks and a number of online “fintech” lenders. Since the 2008 financial crisis, a growing number of nonbank fintech firms that make loans over the internet have partnered with a handful of state-chartered banks (mostly chartered in Utah, Kentucky, and New Jersey) in order to make and market unsecured installment consumer loans. By and large the way the business model works is that although the loan application is submitted through the nonbank’s website or smartphone app, it is the partner bank that actually advances the funds. The marketing and underwriting process are both performed by the nonbank. Then, very shortly after, the bank sells the loan along with others (or some interest in those loans) to the nonbank fintech company or an affiliate. The fintech or another firm then sells the interest to a pre-arranged wholesale buyer or sponsors a securitization of a large pool of loans for sale as securities in the capital markets. 

    The bank’s role is merely passing, and it typically retains no material economic interest in the loans. However, so the argument goes, because the loan is originated by an insured state-chartered bank, it can export the interest rate of its home state to borrowers located in ANY state (with state usury laws preempted by DIDMCA section 521). And sometimes these loans can be quite expensive (rates of 160% APR or more e.g., CashNet USA, Speedy Cash, Rapid Cash, Check n' Go, Check Into Cash). You can get more info on these partnerships and check out some nifty maps provided by the folks at the National Consumer Law Center here. 

    So, here’s how I think consumer advocates can turn the tables. There are a number of states that have aggressively gone after these rent-a-bank schemes (adding a lawsuit by AG of DC to the mix here) and a group of state AGs are currently suing the OCC on account of its true lender rule. In other words, a number of states do not want this kind of high cost, fintech-bank lending happening in their jurisdiction. 

    Here’s my suggestion to those states: why not just pass your own opt out of DIDMCA Section 521? 

    As mentioned above, many of these online lenders in high-cost rent-a-bank schemes favor partnering with FDIC-insured, state-chartered banks rather than national banks. Opting out of DIDMCA would deprive these schemes of their regulatory arbitrage. Without the ability to import the interest rate law of another state into a given jurisdiction, it would force these online firms to apply for a lending license and otherwise abide by the jurisdiction’s usury limit. DIDMCA allowed states to opt out of Section 521, and the statute didn’t give a deadline to do it. So, here’s a call to states like Colorado and others who are going after these usury and regulatory evasive business models…take away the linchpin of the business model. Opt-out of section 521!

    And as for those of us back here in the Hawkeye state, here’s to hoping that the Iowa legislature doesn’t (pardon the Peloton pun) get so easily taken for a ride.

  • Of Usury, Preemption, and Fancy Stationary Bikes

    Posted by

    Christopher Odinet

    Greetings, Slipsters! I’m thrilled to be here guest blogging, and I thank the editors for having me. So with that, let me get started…

    Usury, preemption, and pandemic fitness are all colliding here in Iowa. 

    About two weeks ago, I was alerted to a single strike-through amendment buried in a tax bill currently being considered by the Iowa legislature. This simple little change that eliminates three numbers (“521”) would likely go unnoticed by most lawmakers (or, more realistically—all lawmakers). However, this little change could have a profound impact on Iowa’s ability to prevent high cost, predatory lending from spilling into its borders through website portals and smart phone apps. And, if you stay with me for this bit of guest blogging, you’ll never believe what’s supposedly (so I’m told) behind it all! 

    The bill is HSB 272. Most of the bill contains routine tax code clean-ups and modifications. Indeed, the bill itself is sponsored by the Iowa Department of Revenue. But, take a look at the relevant part of Section 5:

    1980 Iowa Acts, chapter 1156, section 32, is amended to read as follows: SEC. 32.  The general assembly of the state of Iowa hereby declares and states . . . that it does not want any of the provisions of any of the amendments contained in Public Law No. 96-221 (94 stat. 132), sections 521, 522 and 523 to apply with respect to loans made in this state . . .

    If you clicked on the link above and read the entirely of Section 5, you’d probably have to go through the text quite a few times before you’d see what’s being stricken out. The singular change is just the reference to section 521 of Public Law No. 96-221 (94 stat. 132). Otherwise, everything else in this existing statute stays the same. 

    So what’s this about? 

    The only clue as to what this stricken language actually deals with is the reference to “loans made in this state.” In truth, this single little strikethrough will allow FDIC-insured state-chartered banks located in other states to make loans under the usury laws of their home states to the residents of Iowa. This kind of lending usually comes in the way of partnerships between a handful of state-chartered banks and so-called “fintech” nonbank lenders making triple digit loans, hardly any different from payday financing. This partnership lending practice has also been the subject of recent lawsuits, including a summer 2020 settlement by the Colorado AG. If you’re interested in a deep dive on the rent-a-bank model and the unique legal and policy problems it creates, check out forthcoming articles here (by Adam Levitin) and here (by me!).

    The icing on the cake, however, is that the rationale (again, as I’ve been told) advanced by proponents of the bill is that without this amendment, Iowans will not be able to finance the purchase of Pelotons. That’s right. Pelotons!

    Here’s the connection: Peloton currently partners with Affirm, a fintech online lender, in order to help consumers finance the purchase of these roughly $3,000 stationary bikes (bike + membership). Interestingly, both firms generally promote 0% down, 0% APR, 0% hidden fees in their financing package. Of course, if you scroll down to the bottom of the promotional website and read the tiny 10.5 point, gray font print, you’ll notice: 

    Your rate will be 0–30% APR based on credit, and is subject to an eligibility check. Options depend on your purchase amount, and a down payment may be required. Affirm savings accounts are held with Cross River Bank, Member FDIC. Savings account is limited to six ACH withdrawals per month. Affirm Plus financing is provided by Celtic Bank, Member FDIC. Affirm, Inc., NMLS ID 1883087. Affirm Loan Services, LLC, NMLS ID 1479506. California residents: Affirm Loan Services, LLC is licensed by the Department of Financial Protection and Innovation. Loans are made or arranged pursuant to California Financing Law license 60DBO-111681 (emphasis added).

    As you can see, Affirm also plays the rent-a-bank game by partnering with FDIC-insured Utah state bank, Celtic Bank. While 30% APR may not seem like the most expensive loan term in the world, it opens the door to much higher cost lending by firms like Elevate Credit, Opportunity Financial, and more–all of whom use the rent-a-bank model. 

    This is about much more than Pelotons…stay tuned for more (including how I think consumer advocates can turn the tables on this strategy!).

    UPDATE: It appears that HSB 272 isn't going anywhere: no legislative movement since a canceled House subcommittee hearing on April 6. Meanwhile, a duplicate tax bill has been filed in the Senate, but it does not contain the DIDMCA opt-out (SSB 1268).

  • Consumers and Price Volatility: Texas Electricity Prices

    Posted by

    Adam Levitin

    Some Texas consumers who didn't lose power are now finding themselves socked with massive electric bills, as high as $17,000. The reason? They were paying variable kW/h pricing for their electricity at wholesale rates, without any sort of price collar. The Washington Post explains: 

    The state’s unregulated market allows customers to pick their utility providers, with some offering plans that let users pay wholesale prices for power. Variable plans can be attractive to customers in better weather, when the bill may be lower than fixed-rate ones. Customers can shift their usage to the cheapest periods, such as nights. But when the wholesale price increases, the variable plan becomes the worst option.

    This story jumped out at me for two reasons.

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  • Commercial and Contract Law: Questions, Ideas, Jargon

    Posted by

    Melissa Jacoby

    In the Spring I am teaching a research and writing seminar called Advanced Commercial Law and Contracts. Credit Slips readers have been important resources for project ideas in the past, and I'd appreciate hearing what you have seen out in the world on which you wish there was more research, and/or what you think might make a great exploration for an enterprising student. This course is not centered on bankruptcy, but things that happen in bankruptcy unearth puzzles from commercial and contract law more generally, so examples from bankruptcy cases are indeed welcome. You can share ideas through the comments below, by email to me, or direct message on Twitter.

    Also, I am considering having the students build another wiki of jargon as I did a few years ago in another course. Please pass along your favorite (or least favorite) terms du jour in commercial finance and beyond.

    Thank you as always for your input, especially during such chaotic times.

  • American Predatory Lending and the North Carolina model

    Posted by

    Melissa Jacoby

    My coauthor Ed Balleisen has co-founded a program on consumer lending of interest to Credit Slips readers. Its initial data collection is particularly useful in documenting the North Carolina experience and its implications for other states. The quote below is from Balleisen's post on Consumer Law and Policy:  

    Data visualizations of statistics about the North Carolina mortgage market and consumer protection enforcement complement the oral histories, as do a set of policy timelines and memos about state- and national-level regulation of mortgage lending. Our key findings suggest that more stringent oversight of aggressive mortgage practices moderated the housing boom in North Carolina, and so partially insulated the state from the broad collapse in housing values across the country.

  • Coronavirus Will Hasten the Shift To App-Based Banking and Lending. How Will That Affect People’s Pocketbooks?

    Posted by

    Pamela Foohey

    Over at the Machine Lawyering blog — organized and edited by the Chinese University of Hong Kong's Law Faculty’s Centre for Financial Regulation and Economic Development — Slipster Nathalie Martin and I just posted some commentary about our new article, Reducing The Wealth Gap Through Fintech "Advances" in Consumer Banking and Lending, forthcoming in the University of Illinois Law Review. The article, in part, assessing new "advances" in fintech products that promise to provide people with lower-cost banking and lending options. We focus on prepaid cards for wages, early wage access programs, and auto lending apps. We conclude that these products more likely than not will prove to be disadvantageous to consumers. The article's connection to the wealth gap is the recognition that high-cost banking and lending products impede people's ability to convert income into savings. We put forth a few ideas about the hallmarks of banking and lending products that actually may help close the wealth gap by targeting Americans’ unequal access to banking and lending services. 

    Nathalie and I, of course, wrote this article before the coronavirus pandemic. With stay-at-home orders and social distancing in effect, it is highly likely that people's already increasing use of online and app-based banking and lending products will increase even faster. If our analysis proves correct, the spoils of the increased shift will accrue more to providers than to consumers, and people may be able to save even less of their income. The pandemic has highlighted American's lack of savings. Hopefully helping Americans save will become more of a focus in the future.

    Also, on the note of early wage access programs, when we drafted the article, we found effectively no published analysis of early wage access programs. As we were writing, Nakita Cuttino and Jim Hawkins kindly shared their draft articles with us. Both articles are now available SSRN and present interesting (and different) analyzes of early wage access programs. Nakita's article is titled, The Rise of "FringeTech": Regulatory Risk in Early Wage Access. And Jim's article is titled, Earned Wage Access and the End of Payday Lending.

  • 11th Circuit: Student Borrower Consumer Claims not Preempted by HEA

    Posted by

    Alan White

    An 11th Circuit panel ruled last week that student loan borrowers may assert state law misrepresentation claims against a student loan servicer that falsely told them their FFEL loans qualified for Public Service Loan Forgiveness. The servicer, joined by USED, argued that the Higher Education Act preempted the borrowers' state law claims, because the HEA mandates certain disclosures and expressly preempts state laws that would require additional or different disclosures. Attorneys general and consumer lawyers around the country have been battling various versions of these preemption and related sovereign immunity arguments. 

    Kate Elengold and Jonathan Glater have posted an excellent article, the Sovereign Shield, summarizing the state of play.

  • Treasury Must Act Now To Protect Relief Payments From Debt Collectors

    Posted by

    Pamela Foohey

    The CARES Act provides for direct "rebate" payments to American households. Treasury is gearing up to send some of those payments out soon. But Congress forgot to protect the payments from garnishment. American families may see needed funds deposited into their bank accounts only to watch that money disappear. Slipster Dalié Jiménez, Chris Odinet, and I just published a short piece on the Harvard Law Review blog detailing this problem and proposing a simple solution that Treasury Secretary Steven Mnuchin should implement ASAP. 

  • Daniel Schwarcz on the Evolution of Insurance Contracts

    Posted by

    Mitu Gulati

    I shudder even as I write these words, but I’m increasingly fascinated by insurance contracts.  If you are interested in the processes by which standard form contracts evolve – which I am — then you can’t help but be sucked into this world. Coming from the world of sovereign bonds, the insurance world strikes as bizarre. Among the wonderful authors whose worked has sucked me in are Michelle Boardman (here), Christopher French (here) and Daniel Schwarcz (here).

    There are a handful of major players who dominate the insurance industry and everyone seems to use the same basic boilerplate terms tied a core industry-wide form. Further, courts aggressively use an obscure doctrine, contra proferentem (basically, construing terms against the drafter/big bad wolf), that is often ignored in other areas such as the bond world where figuring out who did the actual drafting is a near impossible task.  Finally, while contracts in this world are often sticky and full of long buried flaws, they are also sometimes highly responsive to court decisions. In other words, there is much to be learned about the how and why of contract language evolution as a function of court decisions (a process about which most law school contracts classes make utterly unrealistic assumptions and assertions) by examining insurance contract evolution and comparing it to contract evolution in other areas that don’t share the same characteristics.

    My reason for this post, is to flag a wonderful new paper by Daniel Schwarcz of U. Minnesota Law. The paper, “The Role of Courts in the Evolution of Standard Form Contracts” (here) is on the evolution of insurance contract terms in response to court decisions.  Unlike much of the prior literature on standard form contracts where each paper examines no more than a handful of terms and often finds that contracts are not very responsive to particular court decisions, Daniel examines a wide range of terms (basically, everything) over a long period of time (a half century) and finds a great deal of responsiveness to court decisions.  The question that raises is whether there are features of the insurance industry that are different from, for example, the bond world.  Or whether Dan just studied a lot more changes than anyone before this had done; and, therefore, he was able to see further than prior scholars.

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  • Coercive “Consent” to Paperless Statements

    Posted by

    Adam Levitin

    If you've logged on to any sort of on-line financial account in the past few years, there's a very good chance that you've been asked to consent to receive your periodic statements electronically, rather than on paper. Financial institutions often pitch this to consumers as a matter of being eco-friendly (less paper, less transportation) or of convenience (for what Millennial wants to deal with paper other than hipsters with their Moleskines). While there is something to this, what's really motivating financial institutions first and foremost is of course the cost-savings of electronic statements. Electronic statements avoid the cost of paper, printing, and postage. If we figure a cost of $1 per statement and 12 statements per year, that's a lot of expense for an account that might only have a balance of $3,500—roughly 34 basis points annually.

    I'm personally not comfortable with electronic statements for two reasons. First, I worry about the integrity of electronic records. I have no way of verifying the strength of a bank's data security, and I assume that no institution is hack proof. Indeed, messing around with our financial ownership record system would arguably be more disruptive to the United States than interference with our elections. FDIC insurance isn't very useful if there aren't records on which to base an insurance claim. Of course, the usefulness of a bank statement from two weeks ago for determining the balance in my account today is limited too, but if I can prove a balance at time X, perhaps the burden of proof is on the bank (or FDIC) to prove that it has changed subsequently. 

    Now, I recognize that not everyone is this paranoid about data integrity. Even if you aren't, however, paper can play an important role in forcing one to pay attention to one's financial accounts, and I think that's valuable.  I am much more likely to ignore an email than I am a paper letter in part because I know that the chance the paper letter is junk is lower because it costs more to send than the spam.  As a result, I look at my snail mail, but often let my e-mail pile up unread. And even when I read, I don't always click on the link, which is what would be in an electronic bank statement.  Getting the paper bank statement effectively forces me to look at my accounts periodically, whereas an emailed link to a statement wouldn't. And monitoring one's accounts is just generally a good thing–it helps with fraud detection and helps one know one's financial status.  

    So here's where this is going:  I've got no issue if a consumer wants to freely opt-in to electronic statements.  But the way my financial institutions communicate with me when I go on-line involves really coercive choice architecture. One bank presents me with a pre-checked list of accounts to be taken paperless, such that to not go paperless I have to uncheck several boxes.  I am essentially opted-in to paperless. Another bank has a prominent "I agree" button without an equivalent "I decline" button-the only way to decline paperless is to find the small link labeled "close" to close the pop-up window. "Consent" in this circumstances strikes me as iffy. This strikes me as an area in which regulators (I'm looking at you CFPB) really ought to exercise some supervisory muscle and tell banks to cut it out. If folks want to go paperless, that's fine, but don't try and coerce them. Doing so is contrary to the spirit of the E-SIGN Act at the very least and might enter into UDAAP territory.

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