How High-Interest 'Rent-a-Bank' Loans bypass state rate caps

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How do high-interest'rent-a-bank' loan Sidestep State Rate Caps
Loans from a Rent-a Bank loans are online loans that may charge triple-digit APRs in states that limit interest rates on small loans.


Updated on December 2, 2022

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A Google search on "online loan" returns a list of low-interest personal loans as well as no-credit-check loans which have high-interest rates. These loans could not be offered in all states, if not for"rent-a-bank" business model "rent-a-bank" company model.
This lending method involves financial technology companies who work with banks to provide with triple-digit annual percentage rates to those who do not be eligible for low-interest loans.
Although they're most well-known on the web, you may also encounter rent-a-bank loans at retail stores, 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 opposes rent-a-bank loans.
States have tried to reduce high-interest lending by establishing interest rate caps, but the rent-a bank model permits loans that have an APR of 150% or higher that can be accessed by people across the country. Researchers and consumer advocates say such loans can leave borrowers in long-term debt that's difficult to repay.
What are the rules for rent-a-bank loans work?
The majority of states have laws that limit the maximum interest rate lenders are allowed to charge, but exceptions are often made by banks Saunders says.
It means, when the state decreases its maximum rate of interest, non-banks like payday lenders are often affected, while banks that issue high-cost loans might not be. Currently, state rate caps vary from 17% to 59% on two-year $2,000 loans according to the NCLC. The average APR is 32 percent.
For example, Washington state limits interest rates on two-year $2,000 loans up to 29 percent, however, consumers have the option of getting a loan that has an APR of 100%.
If a company in the field of financial technology (also known as an online lender) would like to provide costly loans to customers across the United States, it works in conjunction with a bank, rather than lending under specific state-specific rates, as a nonbank lender would.
Thus, the expression "rent-a-bank" is a reference to the online lender is thought of as a bank charter rented to issue high-cost loans.
Advocates for consumers say that the Fintech firm should be treated like it's making the loans, which would oblige it to adhere to the state-mandated rate caps.
"The rent-a-bank lenders are obviously trying to circumvent the wishes of voters as well as legislators who don't want predatory lending within their states," Saunders says.
However, some in the lending industry say the arrangement is a beneficial collaboration, not only a rental.
The fintech company brings the expertise of a marketing agency, designing and managing applications, while the bank can navigate complex lending regulations, according to Scott Pearson, head of the consumer financial services group in the legal firm Manatt, Phelps and Phillips LLP.
Pearson, who has represented banks and fintech companies and helps companies navigate regulatory issues, believes that the phrase "rent-a-bank" is not accurate.
"The idea is that you're going to pay a bank a fee to let you use their charter, and this is completely incompatible with the way these things work," he says. "The banks are extremely involved in these partnerships."
How do rent-a-bank loans can be harmful
Rent-a-bank loans make it possible for consumers to get access to the services in states where those rates aren't legally permitted.
Some say they are loans provide necessary access to credit for those with weak credit scores or incomes that would keep them from qualifying for low-cost alternatives like personal loans and credit cards.
"While consumers can enjoy the seafront of companies and products however, not all consumers qualify for each product, principally because of low credit scores or a higher risk to credit," says Andrew Duke as chief executive officer of the Online Lenders Alliance, which represents fintech companies that partner with banks in offering temporary online loans. "The rate is a reflection of the higher risk that the consumer poses to the lender."
But consumer advocates say the loans cause more harm than positive.
A September survey from the Center for Responsible Lending called rent-a-bank loans "some of the most predatory options on the market," they cited rates that range from 100% to 189%.
A loan example from this survey shows rent-abank loan which was paid back over nine months at a 159.33 APR of 159.33 . The borrower paid $2,355 in interest, or more than half the amount the loan.
A key finding from the survey concluded "The burden of repaying high-cost loans frequently caused borrowers to miss payments on other obligations, leading to additional debt or a larger financial deficit -- aggravating rather than easing existing financial difficulties."
Other alternatives to the high interest loans
Consider before you borrow regardless of where you live. Here are a few options.
Ask local nonprofits and charities for help with grocery shopping, gas or utility bills.
If you are experiencing a lot of bills then ask your creditor utility company, or landlord to place you on a payment plan. In the ideal scenario, this is an interest-free method to temporarily cut costs.
Although it may be difficult, you should consider asking your family or friends for a low- or no-interest loan to bridge a income gap or to cover an unexpected expense.

What to do if you have high-interest loan
The Consumer Financial Protection Bureau and states' attorneys general sometimes take action against lenders for predatory practices. If you're stuck in an interest-only loan, Saunders recommends filing an action with both.
If you require legal advice you can contact the NCLC has a legal assistance program, which includes consumers with lower incomes.


About the writer: Annie Millerbernd is an individual loans writer. Her writing has been featured on The Associated Press and USA Today.







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