Kabbage, Inc. Accused of Engaging Celtic Bank in Illegal ‘Rent-a-Bank’ Lending Scheme

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A proposed class action lawsuit claims Kabbage, Inc. engages in an illegal “rent-a-bank” scheme in which it hides behind Celtic Bank Corporation to evade California usury laws and charge small businesses an excessive amount of interest on short-term loans.

The complaint alleges that Kabbage purports to be a marketplace lender, acting as a broker between borrowers and direct lenders such as Celtic Bank. In actuality, the suit suggests, Kabbage itself is a direct lender – responsible for underwriting, funding, and assuming the risk of the loans – and simply pays Celtic Bank “a small commission” on loans in exchange for the use of its name. The bank, according to the case, is a foreign institution chartered in Utah – where no maximum interest rate exists for commercial loans – and not subject to California’s usury laws. Kabbage uses this opportunity to charge borrowers excessive interest rates that often exceed California’s legal limits, the case alleges. Therefore, by writing Celtic’s name on borrowers’ paperwork, the complaint continues, Kabbage is effectively paying the bank to avoid state regulations and reap significant profits from its allegedly shady lending practices.

The lawsuit then explains that Kabbage offers small businesses six- or 12-month loans but misleads them regarding the amount of interest they will be required to pay. From the complaint:

“Kabbage’s loans front load the interest payments with five percent of the loan amount charged for each of the first two payments and one percent charged for each of the remaining four payments of the six-month loans. By front-loading the interest, Kabbage ensures that when borrowers take their next month’s draw that any payments made on the prior loans likely went entirely to interest.”

As a result, the case alleges, borrowers like the plaintiff often find themselves struggling to make payments, at which point Kabbage sells their debts to third-party debt collectors and subjects them to the threat of litigation.

The lawsuit was initially filed in state court and has since been removed to federal court in California. The original complaint can be read below.