In December, a Utah-based bank and its service provider entered into an assurance of discontinuance with the Iowa Attorney General and the Iowa Division of Banking, settling an investigation into allegedly usurious installment loans that the bank made to Iowa consumers. The Iowa AG alleges that, between March 2020 and April 2022, the bank made more than 1,600 installment loans to Iowa residents that imposed excessive finance charges in violation of state and federal law. Some of these loans, according to the Iowa AG, carried interest rates of nearly 200 percent, far in excess of the maximum allowable finance charge of 21 percent under the Iowa Consumer Credit Code and the limits established by Section 521 of the federal Depository Institutions and Deregulation Monetary Control Act.
As part of the settlement, the bank agreed to cease making high-interest installment loans to Iowa residents and to provide restitution payments to Iowa consumers that were harmed by the bank’s allegedly usurious loans. The restitution payments will be in the amount that affected consumers overpaid after retroactively resetting their loans to have an effective APR of 21% and crediting any excess finance charge payments to the consumers’ account balance.
Putting it into Practice: This settlement is consistent with other settlements entered into by the Iowa AG in recent years and should be viewed in light of a broader nationwide focus by state and federal regulators to rein in so-called “rent-a-bank” schemes that allegedly attempt to skirt state-law interest rate caps on consumer loans. Allegations made by many state regulators include that rent-a-bank lending enables financing companies, primarily FinTechs, to avoid state usury laws by routing high-interest loans through out-of-state, federally regulated banks. In some cases, these financing arrangements are associated with high default rates, which has in turn spurred an increase in state legislation and enforcement actions to combat bank partnership arrangements that offer loans in excess of state lending laws (see previous blog post here, here, and here). The CFPB has also recently indicated that it is taking a close look at rent-a-bank operations (see previous blog post here). Fintech companies offering high-interest consumer loan products through out-of-state banks should therefore be aware that both state and federal regulators have their sights set on rent-a-bank operations and that further enforcement actions are likely forthcoming.