Of Usury, Preemption, and Fancy Stationary Bikes

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!).