A dozen consumer protection groups like the National Community Reinvestment Coalition are calling on the Federal Deposit Insurance Corporation (FDIC) to stop a practice known as “rent-a-bank loans,” used by some online lenders to circumvent state interest rate caps on personal loans and set interest rates over 100% or even 200%.
Online lenders like Personify Financials or Opportunity Financial are FinTech companies specialized in providing small loans, ranging from $500 to $4000, for which they charge very high interest rates — usually above the maximum legal established by state laws, which is around 36%, for small loans, depending on each state. However, these online lenders have found a way to circumvent these state caps, and this is by routing loans through a federally chartered bank that can claim an exemption to these rules. This practice is known as “rent-a-bank” scheme.
The letter from the consumer associations comes after Congress moved last year to overturn the Office of the Comptroller of the Currency’s (OCC’s) “true lender” rule from the Trump era, which made it simpler for banks to partner with FinTechs without breaking state interest rate limits.
By signing that bill, President Joe Biden said it would be easier to protect borrowers against predatory lenders who’d found ways around rules and trapped people in cycles of debt.
However, the FDIC hasn´t done the same for the banks it supervises, and the coalition points at six banks that are facilitating these practices: Republic Bank and Trust, FinWise Bank, Capital Community Bank, First Electronic Bank, Transportation Alliance Bank and Lead Bank.
Now these consumers groups want to use some political tailwinds in the FDIC to crack down on this type of “rent-a-bank” loans. FDIC Chair Jelena McWilliams was the only Republican appointee, and this position is now vacant, temporarily filled by Martin Gruenberg as acting chairman. The other two members are Michael Hsu, Comptroller of the Currency and Rohit Chopra, Director of the Consumer Financial Protection Bureau.
Chopra is a strong advocate for consumer protection, and he may be interested in supporting any initiative to terminate predatory lending. Since he was appointed last year as director of the CFPB, he has launched several initiatives to investigate products and services that, in his view, could have a harmful effect on consumers, like Buy Now and Pay Later (BNPL) services, and most recently, on Feb. 2, a consultation on junk fees.
Read more: CFPB Opens Inquiry Against ‘Junk Fees’
It is unclear what Chopra can do as a result of these proceedings at the CFPB. BNPL products are unregulated, but it could propose new regulations to offer more protection to consumers. An outright ban could be seen as disproportionate. But given his precedents at the bureau, consumer associations may find an ally in Chopra to put a limit to these loans.
Alternatively, OppFi, one of the online lenders that partners with banks to provide loans, has defended before the right to provide these loans for consumers with difficult access to credit. It has said, “OppFi is providing outsourcing services to state-regulated, FDIC-insured banks to help them provide affordable loans to millions of everyday consumers who lack access to traditional credit products. The banks that utilize OppFi’s platform have a core competency in community banking, and by working with companies like ours, these banks are able to play a role in expanding credit access to people who need it and who would otherwise be locked out of the system and forced to work with payday lenders or other problematic providers.”
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