‘Rent-a-Bank’ Lending Practices Trigger Calls For Regulation

Consumer advocates are pushing federal banking regulators to do something about rent-a-banks with notoriously sky-high loan rates that prey on people with bad credit, the Wall Street Journal (WSJ) reported on Wednesday (March 11).

A California statue caps interest to an annual rate of 37 percent a year but out-of-state banks have figured out how to sidestep the law and use rates allowable where they are headquartered. OppLoans, for example, partners with a Utah bank and charges an average of 199 percent, according to its website. It is currently charging 160 percent on a typical California loan, the WSJ said. Utah has no caps on interest rates.

“A few banks are making [state consumer] protections moot…[and] regulators haven’t stopped them,” said Alex Horowitz, a senior research officer at the Pew Charitable Trusts, a nonprofit organization that has studied subprime lending. “This could do real harm to millions of families’ financial health.”

An uprush in predatory lending has prompted more states to institute interest rate caps. South Dakota passed a law in 2016, followed by Colorado in 2018.

OppLoans and its Utah partner FinWise Bank have a rent-a-bank partnership that gives it the freedom to avoid caps in numerous states. These types of partnerships have been targeted by state regulators and consumer advocates.

The companies “are intentionally finding ways to evade state law,” Rep. Monique Limón (D-37) told the WSJ. She introduced the new legislation and believes that lenders like OppLoans are violating the California mandate. She is looking to state regulators put a stop to the practice.

An OppLoans spokesperson told the Journal that the lender “is not intentionally evading or breaking state law.” OppLoans “provides outsourced services to…banks to help them provide loans to credit-challenged Americans,” he said. 

FinWise Bank said in a statement it is an “active participant” when it teams up with lenders and “its underwriting takes into account borrowers’ ability to repay the debt.”

The lender feeds on some 38 million people who have credit scores below 600 and can’t get traditional bank loans. 

A Feb. 5 hearing before the House Financial Services Committee had representatives from several consumer groups that said rent-a-bank schemes harm consumers through predatory lending.