The FDIC could fight “rent-a-bank” loans
A dozen consumer advocacy groups, including the National Community Reinvestment Coalition, are calling on the Federal Deposit Insurance Corporation (FDIC) to stop a practice known as “rent-a-bank lending,” used by some online lenders to set federal interest rate caps on retail customers to get around loans and set interest rates above 100% or even 200%.
Online lenders like Personify Financials or Opportunity Financial are FinTech companies that specialize in providing small loans, ranging from $500 to $4000, for which they charge very high interest rates – usually above what is set by state law Maximum rate of about 36% for small credit loans, depending on the state. However, these online lenders have found a way to circumvent these state limits, and that is by routing loans through a state-licensed bank, which can claim an exemption from these rules. This practice is known as the “rent-a-bank” scheme.
The consumer groups’ letter comes after Congress last year repealed the Office of the Comptroller of the Currency’s (OCC) Trump-era “true lender” rule, which made it easier for banks to partner with FinTechs without the breaking state interest rate limits.
By signing this bill into law, President Joe Biden said it would be easier to protect borrowers from predatory lenders who have found ways to circumvent rules and trap people in debt cycles.
However, the FDIC has not done the same for the banks it oversees and coalition points at six banks that facilitate these practices: Republic Bank and Trust, FinWise Bank, Capital Community Bank, First Electronic Bank, Transportation Alliance Bank and Lead Bank.
Now these consumer groups want to use political tailwinds in the FDIC to crack down on these types of “rent-a-bank” loans. FDIC Chair Jelena McWilliams was the only person appointed by the Republicans and that position is now vacant and will be temporarily filled by Martin Grünberg as Acting Chair, 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 may be interested in supporting any initiative to end predatory lending. Since he was appointed director of the CFPB last year, he has launched several initiatives to study products and services that he believes could have a harmful impact on consumers, such as , on February 2, a consultation on junk fees .
Continue reading: CFPB opens investigation into ‘junk fees’
It is unclear what Chopra may do with the CFPB as a result of this proceeding. BNPL products are unregulated but could propose new regulations to give consumers more protection. A total ban could be considered disproportionate. But given his precedents at the Bureau, consumer groups could find an ally in Chopra to limit those loans.
Alternatively, OppFi, one of the online lenders that works with banks to provide loans, has defended the right to provide those loans to consumers with difficult access to credit. It said, “OppFi provides outsourcing services to state-regulated, FDIC-insured banks to help them provide affordable credit to millions of consumers who cannot access traditional credit products. The banks that use OppFi’s platform have a core competency in community banking, and by working with companies like ours, these banks can play a role in expanding access to credit to people who need it and who would otherwise be left out of the system forced to work with payday lenders or other problem vendors.”
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