Recently, Lead Bank and its loan servicer Hyphen, LLC, an online lending platform operating Helix Financial, filed a motion to dismiss a purported class action alleging violations of the Georgia Installment Loan Act (GILA) and Georgia racketeering law arising out of a consumer installment or “payday loan.” Specifically, the plaintiff alleged that the loan agreement between herself and Lead Bank was “nothing more than a façade, and a temporary one at that” in an attempt to evade Georgia’s restrictions on payday lending.
In 2019, the plaintiff, a Georgia resident, entered into an installment loan with Lead Bank. Lead Bank is a Missouri-chartered bank and the loan agreement provided for Missouri law to govern. The loan agreement also specified that Hyphen would act as Lead Bank’s servicer for the loan and contained an assignment clause allowing Lead Bank to transfer or assign its rights under the agreement. Four years later, the plaintiff filed a complaint in the Middle District of Georgia, alleging that Hyphen is the “true lender” and that Hyphen violated the GILA by charging an interest rate higher than the rate allowed under the statute. Specifically, the complaint alleges that the annual percentage rate (APR) on her $700 loan was 547%, while the maximum allowable APR on such a loan in Georgia is capped at 10%. The plaintiff further alleged violations of Georgia’s RICO statute against Lead Bank and Hyphen for purportedly conspiring to charge an interest rate higher than what is allowed by statute.
In its motion to dismiss, Lead Bank argues that, as a state-chartered bank, it is authorized under § 27 of the Federal Deposit Insurance Act to charge interest on a loan “at the rate allowed by the laws of the State . . . where the bank is located.” In other words, it is allowed to export the maximum interest rate of the state of Missouri to the plaintiff’s state of Georgia. Further, Lead Bank invokes the “valid-when-made” rule, providing that if the interest rate in the original loan agreement was not usurious, then the loan does not become usurious upon its assignment to Hyphen.
But the plaintiff argues that the legal arrangement between Lead Bank and Hyphen was a façade that violates Georgia’s Payday Lender Statute, specifically, § 16-17-2(a), which applies to any arrangement in which a de facto lender purports to act as the agent for an exempt entity and provides that the “purported agent shall be considered the de facto lender if the entire circumstances of the transaction show that the purported agent holds, acquires, or maintains a predominant economic interest in the revenues generated by the loan.” The plaintiff alleges that Hyphen is in fact the “true lender” as it is responsible for all material aspects of the transaction, “i.e., the lead generation, loan origination, servicing, and collection of the loans. In other words, the bank is a front for [Hyphen].” Neither the complaint nor the motion to dismiss describe Lead Bank’s continuing economic interest in the subject loan.
With more and more states enacting “predominant economic interest” and “true lender” tests aimed at bank partnerships, we expect to see a rise in this type of litigation. As discussed here, late last year a California state court denied a preliminary injunction sought by the California Department of Financial Protection and Innovation in its long-running litigation against Opportunity Financial (OppFi) contending that OppFi is the “true lender,” and therefore subject to California usury limits, on loans originated by OppFi’s Utah bank partner. The Georgia case presents another vehicle for courts to address this issue. We will be following it closely.