How can high-interest'rent-a-bank' loans can bypass State Rate Caps

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How High-Interest 'Rent-a-Bank' Loans bypass state rate caps
The Rent-a-Bank loans are online loans which may have three-digit APRs within states where they have caps on interest rates on small loans.


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A Google search of "online loan" returns a list of low-interest personal loans along with credit-check-free loans that have high rates of interest. These loans could not be offered in many states if it weren't for"rent-a-bank," or the "rent-a-bank" company model.
This method of lending involves firms that use financial technology to collaborate with banks to offer loans at triple-digit annual percentage rates to customers who might not qualify for lower-interest loans.
Although they're most well-known online, you could also encounter rent-a-bank loans at stores that sell retail such as auto repair shops, or pet stores, according to Lauren Saunders, associate director at the National Consumer Law Center, which is a consumer advocacy group and against rent-a-bank loans.
States have tried to curb high-interest lending by setting limits on interest rates, but the rent-a-bank model permits loans that have an APR of 150% and higher that can be accessed by people across the country. Research and consumer advocates warn that these loans can leave borrowers in lengthy debt that's hard to repay.
How do bank-rental loans function?
Many states have laws restricting the maximum interest rate that lenders can charge, however exceptions are often made for banks, Saunders says.
This means that when a state decreases its maximum interest rate, banks like payday lenders are typically affected, but banks that offer high-cost loans are not. Currently, state rate caps vary between 17% and 59% on two-year, $2,000 loans as per the NCLC. The average APR is 32%.
For instance, Washington state limits interest rates for two-year, $2,000 loans at 29%, but consumers have the option of getting a loan that has 100% APR.
When a financial technology company (also known as an online lender) is looking to provide expensive loans to customers across the country they work with a bank, instead of lending under the state's rate capsas the nonbank lender would.
This is why the term "rent-a-bank": The online lender is thought of as renting the bank's charter to issue costly loans.
The Fintech firm should be treated as if it was making the loans and oblige it to adhere to the caps on state rates.
"The rent-a-bank lenders are obviously trying to get around the preferences of voters and legislators who do not want lending that is predatory in their state," Saunders says.
However, some in the lending industry say the arrangement is a beneficial collaboration, not only renting.
The fintech company brings experience in design, marketing and managing applications, while the bank can navigate complex lending regulations, claims Scott Pearson, head of the consumer financial services division in the legal firm Manatt, Phelps and Phillips LLP.
Pearson, the lawyer who represents banks and fintech companies and helps them navigate regulatory issues, says the term "rent-a-bank" is not accurate.
"The idea is that you're just going to pay a bank to permit you to use their charter, and this is completely incompatible with the way these things work," he says. "The banks are actively involved in these partnership arrangements."
How do rent-a-bank loans can be harmful
Rent-a-bank loans make it possible for consumers to get access to the services who live in states where the rates aren't legal.
Some say these loans provide necessary access to credit for people with low credit scores or income that could prevent them from being eligible for less expensive options such as personal loans or credit cards.
"While consumers can enjoy the seafront of companies and products, not every consumer qualifies for each product, principally due to poor credit or higher credit risk," says Andrew Duke as chief executive officer of the Online Lenders Alliance, which represents fintech companies who partner with banks in offering short-term online loans. "The rate is a reflection of the higher risk that the consumer poses to the lender."
But advocates for consumers say that the loans are more harmful than they do good.
A survey conducted in September by the Center for Responsible Lending called rent-a-bank loans "some of the most predatory on the marketplace," with rates ranging from 100% to 189%..
A loan example in the survey shows a rent-abank loan repaid over about nine months with a 159.33 APR of 159.33 . The borrower paid $2,355 in interest, which was more than half of the amount the loan.
The main conclusion of the survey concluded "The cost of repaying high-cost loans often led borrowers not pay their other obligations, leading to more debt or a bigger financial deficit , which can be aggravating rather than easing existing financial difficulties."
Alternatives to high-interest loans
Consider before you borrow regardless of the location you reside in. Here are a few options.
Seek help from local nonprofits or charities for assistance with grocery shopping, gas or utility bills.
If you are experiencing a lot of bills, ask your creditor, utility company, or landlord to set you up on a payment plan. In the ideal scenario, this is an opportunity to pay no interest and short-term cut costs.
Though doing so may be difficult, you should consider asking your family or friends for an interest-free, low- or zero-interest loan to bridge a gap in income or pay for an unexpected cost.

What should you do if have high-interest loan
The Consumer Financial Protection Bureau and the states' attorneys general can decide to take action against lenders who engage in predatory practices. If you're caught in an interest-only loan, Saunders recommends filing an action with both.
If you need legal help for legal assistance, the NCLC provides a number of services , including for consumers with poor incomes.


About the author: Annie Millerbernd is a personal loans writer. Her work has been published on The Associated Press and USA Today.







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