How High-Interest Rent-a-Bank Loans Bypass State Rate Caps

An online search for “online loan” returns a list of low interest personal loans as well as no credit check loans with high interest rates. The latter might not be available in many states were it not for the “rent-a-bank” business model.

This method of lending involves fintech companies partnering with banks to distribute installment loans with triple-digit annual percentage rates to consumers who may not qualify for low-interest loans.

Although they’re most popular online, you may also come across bank lease loans at retail stores, auto repair shops or pet stores, says Lauren Saunders, associate director at the National Consumer Law Center, which defends consumers and against the rent. a-bank loans.

States have tried to limit high-interest loans by setting interest rate caps, but the bank leasing model allows loans with APRs of 150% or more to reach people across the world. country. Consumer advocates and researchers say such loans can leave borrowers in long-term debt that is difficult to repay.

Most states have laws limiting the maximum interest rate lenders can charge, but exceptions are often made for banks, Saunders says.

This means that when a state lowers its maximum interest rate, non-banks like payday lenders are often affected, but banks that provide high-cost loans may not. Currently, state rate caps range from 17% to 59% on two-year, $2,000 loans, according to the NCLC. The median APR is 32%.

For example, the state of Washington limits interest rates on $2,000 two-year loans to 29%, but consumers can still get a loan with an APR of 100%.

When a fintech company, or an online lender, wants to offer expensive loans to consumers across the country, they work with a bank, rather than lending according to state caps like a lender would. non-banking.

Hence the term “rent-a-bank”: The online lender is seen as renting the bank’s charter to provide high cost loans.

Consumer advocates say the fintech company should be treated as if it were making the loans, which would require it to meet state rate caps.

“Bank lease lenders are obviously trying to circumvent the will of voters and the will of legislatures who don’t want predatory lending in their state,” Saunders said.

But some in the lending industry say the arrangement is a beneficial collaboration, not just a lease.

The fintech company brings expertise in app marketing, design and management, while the bank can navigate complex lending regulations, says Scott Pearson, head of the firm’s consumer financial services group. lawyers Manatt, Phelps and Phillips LLP.

Pearson, who has represented banks and fintech firms and helps them navigate regulatory issues, says the term “rent-a-bank” is misleading.

“The suggestion is that you’re just going to pay a bank to let you use their charter, and that’s completely inconsistent with the way these things work,” he says. “Banks are very actively involved in these partnerships.

Rent-a-bank loans allow high interest loans to reach consumers in states where these tariffs are not legal.

Some say these loans provide needed access to credit for people with low credit scores or low incomes, which would prevent them from qualifying for lower-cost options like personal loans and credit cards.

“While consumers have the waterfront of businesses and products, not all consumers are eligible for every product, primarily due to poor credit or higher credit risk,” says Andrew Duke, executive director of the Online Lenders Alliance, which represents fintech companies that partner with banks by offering short-term online loans. “The rate reflects a higher risk the consumer places on a lender.”

But consumer advocates say the loans do more harm than good.

A September survey by the Center for Responsible Lending called bank lease loans “among the most predatory in the market,” citing rates of 100% to 189%.

An example loan in the survey shows a $3,000 rent-a-bank loan repaid over approximately nine months at an APR of 159.33%. The borrower paid $2,355 in interest, more than half of what was borrowed.

A key finding of the survey concluded that “the burden of repaying high-cost loans often caused borrowers to miss payments on other obligations, leading to additional debt or a greater financial shortfall – compounding, rather than ‘alleviating pre-existing financial challenges’.

• Seek help from local nonprofits and charities to help pay your grocery, gas, or utility bills.

• If the bills are piling up, ask your creditor, landlord, or utility company for a payment plan. Ideally, this is an uninteresting way to temporarily cut costs.

• Although it may be difficult, consider asking friends or family for a low-interest or no-interest loan to fill an income gap or cover an unexpected expense.

The Consumer Financial Protection Bureau and state attorneys general sometimes take action against lenders for predatory practices. If you’re stuck in a high-interest loan, Saunders recommends filing a complaint with both.