NPR recently reported a move to limit fintechs from lending through rent-a-banks, which could negatively impact credit cards issued through innovators, who allow card issuance through rented bank credentials.
The focus is now on the installment credit model, particularly those who offer short-term loans primarily online. These loans are one step up from PayDay lending. PayDay lending in Florida is legal for single repayment loans up to $500, for 304%. Maine permits PayDay loans with a small loan cap of 30% up to $2,000. Massachusetts forbids PayDay lending, similar to 13 other states and DC.
While PayDay lending operates under state law by uninsured lenders (those not subject to scrutiny by the FDIC or NCUA), a trend is emerging where some non-bank lenders will book loans through a handful of federally or state-insured banks so they can cross state lines. Finance companies must follow state rules. Nationally chartered rates may export to other states, using the maximum interest rate permitted in the state. In other words, if you are in a state with no usury limit and want to operate in a state with a 20% limit, lending under the Rent-A-Bank model permits you to use the higher rate.
The National Consumer Loan Center (NCLC) cites five lenders: EasyPay, Elevate, Enova, LoanMart, Opploans, Personify Financial, Axxess Financial, and Check Into Cash. In essence, NCLC says that fintechs are maneuvering around state usury laws by lending through rent-a-banks.
The Center for Responsible Lending (CRL), another consumer group, said the last year that “Predatory lenders are making loans of 100% APR or more in states with limits of 36% or less by laundering loans through an out-of-state bank that is not subject to state interest rate limits. This is a rent-a-bank scheme.”
The National Consumer Law Center co-authored a note to the Acting Chairman of the FDIC, the Acting Comptroller of the Office of the Comptroller of the Currency (OCC), and the Director of the CFPB in early February 2022. The note begins with a strong claim:
- FDIC-supervised banks are helping predatory lenders make loans up to 225% APR which is illegal in almost every state. Moreover, these rent-a-bank schemes often operate under the guise of innovative “fintech” products, even as their high-cost, high-default business model inflicts harms similar to those imposed by traditional payday lenders.
Rent-A-Banks included in the note were Republic Bank and Trust (Kentucky), FinWise Bank (Utah), Capital Community Bank (Utah), First Electronic Bank (Utah), Transportation Alliance Bank (Utah), and Lead Bank (Missouri)
Add Rent-A-Banks to your regulatory watch list.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group