FDIC Could Fight ‘Rent-a-Bank’ Loans

A dozen consumer protection groups like the National Community Reinvestment Coalition are calling on the Federal Deposit Insurance Corporation (FDIC) to end a practice known as “bank lease lending,” used by some online lenders to circumvent state interest rate caps on personal loans. loans and set interest rates above 100% or even 200%.

Online lenders like Personify Financials or Opportunity Financial are FinTech companies that specialize in granting small loans, ranging from $500 to $4,000, for which they charge very high interest rates – usually above the established legal maximum by state laws, which is about 36%, for small loans, depending on each state. However, these online lenders have found a way around these state caps, and that is by routing loans through a federally chartered bank that can claim an exemption from these rules. This practice is known as the “rent-a-bank” system.

The consumer groups’ letter comes after Congress decided last year to roll back the Trump-era Office of the Comptroller of the Currency (OCC) ‘true lender’ rule, which made it easier for banks to partner with FinTechs without breaking state interest rate limits.

By signing this bill, President Joe Biden said it would be easier to protect borrowers from predatory lenders who had found ways to circumvent the rules and trapped people in cycles of debt.

However, the FDIC has not done the same for the banks it supervises, and the coalition names 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 some political tailwinds within the FDIC to crack down on this type of “rent-a-bank” lending. FDIC Chair Jelena McWilliams was the only Republican appointee, and that position is now vacant, temporarily filled by Martin Gruenberg 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 he might be interested in supporting any initiative to end predatory lending. Since being named director of the CFPB last year, he has launched several initiatives to investigate products and services that he believes could have a detrimental effect on consumers, such as the Buy Now and Pay Later services ( BNPL), and more recently, on February 2, a consultation on junk fees.

Read more: The CFPB opens an investigation against “undesirable fees”

It’s unclear what Chopra may do as a result of these procedures at the CFPB. BNPL’s products are unregulated, but it could propose new regulations to offer more protection to consumers. An outright ban could be considered disproportionate. But given his precedents at the office, consumer associations could find an ally in Chopra to put a limit on such loans.

Alternatively, OppFi, one of the online lenders that partners with banks to provide loans, has argued in court to provide these loans to consumers with difficult access to credit. He said, “OppFi provides outsourcing services to state-regulated and FDIC-insured banks to help them provide affordable loans to millions of everyday consumers who lack access to traditional credit products. Banks using OppFi’s platform have a core competency in community banking, and by working with companies like ours, these banks are able to play a role in expanding access to credit to people who need it and who would otherwise be shut out of the system and forced to work with payday lenders or other problematic providers.

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On: Seventy percent of BNPL users say they would prefer to use the installment plans offered by their banks – if only they were made available. PYMNTS’ Banking On Buy Now, Pay Later: Installment Payments and the Untapped Opportunity of FIssurveyed over 2,200 US consumers to better understand how consumers view banks as BNPL providers in a sea of ​​BNPL pure-players.

Harry L. Blanchard