Listen to this post

On January 29, a Missouri-based bank and its Kansas-based fintech loan servicer filed a joint motion to dismiss a purported class action filed against them alleging violations of the Georgia Installment Loan Act (GILA) and state RICO law, arising out of a consumer installment loan. 

According to the complaint, the plaintiff alleges that the bank partnership was a “rent-a-bank” scheme designed to circumvent Georgia’s restrictions on payday lending such that the fintech servicer, rather than the bank, was the “true lender” under the loan agreement. The loan, which was governed by Missouri law, was entered into in 2019. Four years later, plaintiff brought suit in federal court on claims that the fintech servicer was actually the “true lender” and that the bank violated the GILA by charging an APR in excess of 540%, a rate that substantially exceeds Georgia’s 10% rate cap. 

In its motion to dismiss, defendants argued as follows:

  • As a Missouri-chartered institution, the bank it is exempt under the GILA and authorized under Section 27 of the Federal Deposit Insurance Act to export the maximum interest rate where it is chartered, to Georgia. Because the contracted-for interest rate is allowable in Missouri, the bank violated no laws.
  • The loan was “valid when made.” Because the interest rate in the original loan agreement was not usurious, it does not become so upon assignment. 
  • Allegations that the bank is not the true lender and conspired to collect on an unlawful debt are “formulaic recitations” of a conspiracy as the bank was the “true lender.” 

Putting it into Practice: With more and more states targeting bank partnership arrangements, either through legislation (as discussed here, here, and here) or enforcement actions (as discussed here and here) based on the “true lender” legal theory, which posits that nonbanks “rent” bank charters to, among other things, evade state usury laws, institutions can expect to see a rise in class actions alleging claims similar to the ones raised here. One possible mitigation strategy—a good arbitration provision. As we have discussed previously, arbitration provisions may help companies avoid similar class actions. However, as noted, they will not eliminate the risk of “true lender” challenges brought by regulatory agencies.