Blog: Iowa Targets Out-of-State Bank Partner For Usury, Shedding Light … – Mondaq

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Iowa Targets Out-of-State Bank Partner For Usury, Shedding Light On State’s Interpretation Of DIDMCA Opt-Out

17 January 2023

Mayer Brown

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In December, the State of Iowa and the Iowa Division of Banking
entered into an Assurance of Discontinuance (“AOD”) with
Transportation Alliance Bank, Inc. (the “Bank”) settling
claims that the Bank charged usurious rates of interest on 1,611
loans to Iowa consumers between 2020 and 2022.

Iowa alleges in the AOD that with the assistance of its service
provider EasyPay, the Bank charged interest at a rate exceeding
Iowa’s 21% APR maximum rate that is permitted for
“supervised financial organizations” (depository
institutions) under the Iowa Consumer Credit Code
(“ICCC”). The settlement has potential implications for
out-of-state state-chartered banks who are “exporting”
home state interest rates and fees on loans made to Iowa residents.
It also highlights the Iowa Attorney General’s interpretation
of the state’s opt-out of the federal Depository Institutions
Deregulation and Monetary Control Act of 1980 (“DIDMCA”)
in connection with loans made to Iowa residents by out-of-state
state-chartered banks.

Background

EasyPay and the Bank are parties to a bank partner program.
Pursuant to this arrangement, EasyPay facilitates consumer loans
through its online platform, which loans are originated by the
Bank. Iowa’s generally applicable usury cap for loans made in
the state varies with the yield of US government debt and is
currently set at 6%. The ICCC authorizes certain entities, such as
banks, to charge a higher rate on “consumer loans,” which
are essentially loans that do not exceed federal Regulation Z’s
floating threshold amount (currently set at $66,400 for 2023); that
are made for a personal, family, or household purpose; and that
include second- but not first-lien mortgage loans. As supervised
financial organizations, banks such as the Bank are authorized by
the ICCC to charge up to a maximum 21% APR on these consumer loans.
While the AOD does not discuss the rates allegedly charged under
the EasyPay program, the press has reported that interest rates have exceeded
100%.

The Settlement

The AOD directs the Bank to provide restitution to Iowa
consumers to compensate for interest they paid above the applicable
21% APR cap. Although the AOD is an agreement between Iowa and the
Bank, it is binding on EasyPay as well—albeit only to the
extent of EasyPay’s services to the Bank in its role as a
service provider. The Bank, which claims to have ceased making Iowa
loans as of April 2022, does not admit to any violations of Iowa
law or DIDMCA as part of the settlement. The Bank also agreed to
notify the state before restarting its lending activities in
Iowa.

DIDMCA Interest Exportation and Iowa Loans

The AOD reaffirms how Iowa officials view the impact of the
state’s decision to opt-out of DIDMCA’s interest rate
preemption. DIDMCA was enacted in the 1980s to establish parity
between national and state-chartered banks by allowing state banks
to export any interest rate lawful in their home or host state to
other states, even if the usury cap in the other states is lower,
as national banks are authorized to export interest rates under
Section 85 of the National Bank Act. DIDMCA allowed the states to
opt out, however. Ultimately, Iowa and Puerto Rico are the only
states that chose to opt out. (Other states initially opted out but
later rescinded their opt-outs.) There has since been disagreement
on the meaning of a state’s decision to opt out of DIDMCA’s
interest rate exportation authority for state-chartered banks.

Since the opt-out rights granted to states permitted them to opt
out with respect to loans made in the jurisdiction, many
have concluded that banks located in Iowa or Puerto Rico have no
ability to export the legal interest rates of their home state when
lending to consumers located in other jurisdictions. Under this
interpretation, Iowa’s opt-out has no effect on out-of-state
state-chartered banks lending to Iowa borrowers. An alternative
interpretation is that an out-of-state state-chartered bank cannot
export its home state interest rates into Iowa when
lending to Iowa consumers. Iowa’s Attorney General’s office
has historically taken this view, but there has not been any recent
enforcement activity against out-of-state state-chartered banks
prior to the AOD. The AOD specifically alleges a violation of
section 521 of DIDMCA, which is the provision that grants interest
exportation authority to state banks, making it clear that the
state is alleging that an out-of-state state chartered bank, such
as the Bank, cannot export the interest rate permitted by its home
state of Utah (which permits banks to charge any agreed-on rate).
.

Takeaways

Because Iowa alleges that the loans were usurious for an
out-of-state state-chartered bank, there was no need or attempt to
recharacterize EasyPay as the true lender under the bank partner
program. This is different than many enforcement actions in other
states that target the nonbank partner in a bank partnership
agreement instead of the bank—either as the “true
lender” of program loans instead of the bank or as an
unlicensed arranger or purchaser of program loans where the state
imposes such licensing obligations. Nevertheless, the AOD will have
implications for bank partner programs with state-chartered
banks.

The AOD is likely to result in out-of-state state-chartered
banks excluding Iowa residents from their loan programs or limiting
the rate of interest on these loans to 21%. While the AOD relates
to a bank partner program between the Bank and EasyPay, the
implications from the settlement could potentially extend beyond
those programs to any loans made by an out-of-state state-chartered
bank to Iowa residents.

National banks and their loans to Iowa residents are not
impacted by the AOD as there is separate authority in the National
Bank Act that would allow out-of-state national banks to export
interest rates of their home state to Iowa residents.

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This
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article provides information and comments on legal
issues and developments of interest. The foregoing is not a
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