Bank Regulation

Lawmakers Grill Consumer Groups On ‘Rent-A-Bank’ Schemes

percentage rates

At a Wednesday (Feb. 5) hearing before the House Financial Services Committee, representatives from several consumer groups said “rent-a-bank” schemes harm consumers through predatory lending.

The hearing was titled “Rent-a-Bank Schemes and New Debt Traps: Assessing Efforts to Evade State Consumer Protections and Interest Rate Caps.”

Lauren Saunders, who serves as associate director of the National Consumer Law Center, said state-regulated lenders “lauder their loans up to 160 percent annual percentage rates through banks in order to evade state interest rate caps. These schemes are spreading across the country and are starting to explode.”

She noted that states have interest rate caps on non-bank installment loans, with a median cap on a $500 loan of about 37.5 percent.

The Rent-a-Bank Scheme

Through the “rent-a-bank” method, she detailed, state-regulated lenders claim they are “merely the agent, service provider or assignee of the bank” that funds the loan but then quickly sells the loan or the receivables.

(In terms of general practice, lenders, including those that operate online, must partner with chartered banks.)

“Because the funds originally come from the bank, the lender claims that state usury laws are preempted,” Saunders explained.

She said the evasion would continue unless regulators step in or there is action by Congress to limit interest rates to no more than 36 percent APR. She recommended that Congress pass the Veterans and Consumers Fair Credit Act to extend the 36 percent rate that applies to servicemembers and their families.

Separately, Graciela Aponte Diaz, director of federal campaigns for the Center for Responsible Lending, testified that some companies, publicly traded, have said in their own remarks that they intend to continue what Diaz said were rent-a-bank schemes. In one example, she said Elevate Credit had said it would sidestep California laws that would cap interest rates on loans larger than $2,500.

As Elevate Credit has said, it expects to be able to “continue to serve California consumers via bank sponsors that are not subject to the same proposed state level rate limitations.”

She offered a list of other firms engaged in similar practices, such as LoanMart, where auto title loan rates range from 60 percent to 222 percent, and where bank sponsors are based in Utah. Testimony from Diaz and Saunders identified three banks based in Utah tied to such schemes.

“Only a small number of banks are involved,” Saunders said in her testimony, “but they have a big impact.”

In a statement released after the hearing, the Online Lenders Alliance, through CEO Mary Jackson, said, “Today's hearing clearly demonstrates that many members of the House Financial Services Committee have more work to do when it comes to understanding the borrowers of these types of financial products, why consumers rely on them, and their overall satisfaction with them. Bank-fintech partnerships lead to increased innovation and more competition in the marketplace, providing consumers with loans that satisfy their unique requirements … these partnerships are operating within the bounds of federal law.”

She went on to contend that  “what is baffling is that the proposal of a national rate cap preempts 43 state consumer finance laws and that some witnesses complained that bank products can't preempt the state law, but they are okay with a national preemption.” She said only 1 percent of all consumer complaints in the Consumer Financial Protection Bureau’s database are related to these types of loans.

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