As Congress Shines Light on Rent-a-bank Schemes, 100+ Groups Urge FDIC to Rescind Plan that Facilitates their Spread

For Immediate Release: February 5, 2020

Contact: Jessinia Brooks, 212-574-3415, jessinia.brooks@berlinrosen.com

As Congress Shines Light on Rent-a-bank Schemes, 100+ Groups Urge FDIC to Rescind Plan that Facilitates their Spread

Watch hearing on the topic in the House Financial Services Committee

Banking agency that currently allows “rent-a-bank” schemes with triple digit interest loans that evade state laws poised to make them easier with proposed rule 

Washington, DC – Today, as the House Financial Services Committee holds a hearing titled “Rent-A-Bank Schemes and New Debt Traps: Assessing Efforts to Evade State Consumer Protections and Interest Rate Caps,” the Stop The Debt Trap campaign released a comment letter submitted to the FDIC urging it to rescind a proposed rule that would facilitate this predatory lending. The letter was signed by more than one hundred organizations, including civil rights, consumer, faith, and small business groups. The FDIC plan would make it easier for companies to issue 100%+ annual interest rate loans, in violation of state rate cap laws, by creating sham partnerships with banks. Text of the entire coalition letter is provided below.

The letter points out that nearly every state has at least some interest rate caps on loans and that the FDIC is already allowing a handful of banks under its jurisdiction to engage in rent-a-bank schemes (as shown in this map). These schemes include 160% APR personal loans in 24 states that prohibit them and an astonishing 120% APR on a $550,000 small business loan. Three publicly traded lenders already told their investors they plan on dodging California’s new usury law.

The coalition’s letter, in part, states:

“The FDIC’s proposal would undoubtedly embolden schemes like these, where high-cost non-bank lenders use banks, which are not generally subject to state usury limits, to originate loans at rates well in excess of the rates the non-bank lender—like Elevate, OppLoans, Enova, and World Business Lenders—could charge on its own under state law. These arrangements are plainly designed to evade state usury laws.”

The letter also states:

“Interest rate limits are the single most effective tool states have to protect their residents from predatory loans…. These loans target financially distressed individuals, compound their debt burden, and leave them worse off. Payday lenders also disproportionately prey on communities of color, stripping them of income, exacerbating financial exclusion, and widening the racial wealth gap.”

The FDIC comment period on the proposed rule ended late last night. Full text of the coalition’s letter follows:

 

February 4, 2020

 

The Honorable Jelena McWilliams

Chairman

Federal Deposit Insurance Corporation

1776 F Street, NW

Washington, DC 20006

Delivered electronically via email

Re: Comments on FDIC Notice of Proposed Rulemaking, Federal Interest Rate Authority, 12 CFR Part 331, RIN-3064-AF21

Dear Chairman McWilliams,

The undersigned community, consumer, civil rights, faith and small business organizations write to strongly oppose the FDIC’s proposed rule on “federal interest rates,” which threatens to eviscerate state interest rate limits around the country and encourage the spread of predatory lending.

Interest rate limits are the single most effective tool states have to protect their residents from predatory loans. Predatory loans include payday and car title loans that often carry annual interest rates as high as 300% or more. Predatory loans also include high-cost installment loans and lines of credit with rates approaching and well exceeding 100%. These loans target financially distressed individuals, compound their debt burden, and leave them worse off. Payday lenders also disproportionately prey on communities of color, stripping them of income, exacerbating financial exclusion, and widening the racial wealth gap.

From the founding of our nation, states have had authority to limit interest rates, and they still do for entities other than banks. Forty-three or more states and the District of Columbia (DC) have rate caps on installment loans, depending on the size of the loan, with a median cap among those states of about 36.5% for a $500, 6-month loan. Sixteen states and DC—representing about a third of the U.S. population—enforce interest rates of 36% or lower that keep short-term payday loans, in addition to longer-term high-cost loans, out of their borders.

The FDIC’s proposal would place all of these rate caps in grave jeopardy. Already, two FDIC-supervised banks, Republic Bank & Trust (of Kentucky) and FinWise Bank (of Utah) are enabling high-cost lenders Elevate, OppLoans, and/or Enova to evade state rate caps in over half the states, with loans of up to 160% APR, through “rent-a-bank” schemes. FDIC-supervised Capital Community Bank (of Utah) appears to be helping car title lender LoanMart evade state law in a number of states. LoanMart’s loans range from 60-222% interest; a typical loan is $2,500, 18-month loan at 90%, totaling $2,136 in interest. And FDIC-supervised Bank of Lake Mills (of Wisconsin) has enabled predatory small business loans, including a 120% APR $550,000 small business loan and a 74% APR loan secured by a second mortgage.

Moreover, as California enacts its new interest rate cap of about 36% on loans $2500 or larger, high-cost lenders have brazenly announced plans to circumvent that new law by forming new rent-a-bank schemes. Reports are that at least one deal has already been struck with Republic Bank & Trust.

The FDIC’s proposal would undoubtedly embolden schemes like these, where high-cost non-bank lenders use banks, which are not generally subject to state usury limits, to originate loans at rates well in excess of the rates the non-bank lender—like Elevate, OppLoans, Enova, and World Business Lenders— could charge on its own under state law. These arrangements are plainly designed to evade state usury laws. Under traditional application of state usury laws, courts look beyond the form to the substance when a transaction is designed to avoid application of a state’s usury laws. Yet the FDIC’s proposal flatly provides that state-regulated entities may charge usurious rates when they purchase loans originated by a bank.

The FDIC’s statement that this proposal is not addressing the “true lender” doctrine is of no comfort. Already, the schemes noted above are going unchecked on the FDIC’s watch; the proposal offers no indication that the agency will address future schemes like these; and placing the burden of proving the bank is the “true lender” on state regulators and private litigants, within the landscape of the FDIC’s proposal being finalized, is largely if not entirely unworkable. The proposal replaces the clear and simple rule that interest charged by state-regulated entities must comply with state law with a rule that encourages high-cost lenders to take their chances. Indeed, it may be the green light many predatory lenders need to operate largely, if not primarily, through rent-a-bank schemes.

The FDIC’s proposal broadly exceeds the scope of the agency’s authority, since it simply has no authority to regulate the interest rates of non-banks and has no broad preemption authority. The FDIC also wholly fails to demonstrate any need for this proposal while ignoring the clear and present dangers. The agency acknowledges that the “uncertainty” it aims to address (the sale of loans from banks to non-banks post the Madden v. Midland court decision) is actually not a problem at all, noting that Madden, four years later, has had no widespread or significant impact on the market.

We wholly reject the agency’s suggestion that this proposal may be needed to enable lenders to meet the credit needs of the financially vulnerable. To the contrary, it would make the financially vulnerable more so, facilitating the spread of predatory lending, and—betraying our federalist system— jeopardizing the most effective tool states have to stop it.

We appreciate your consideration of our concerns.

Yours truly,

 

Alabama Appleseed Center for Law & Justice

Alaska Public Interest Research Group (AKPIRG)

Allied Progress

Americans for Financial Reform Education Fund

Arizona PIRG

Arizona PIRG Education Fund

Arkansans Against Abusive Lending

Arkansas Community Organizations

Asian Law Alliance (California)

Atlanta Legal Aid Society, Inc.

Bay Area Legal Aid (California)

The Bell Policy Center (Colorado)

Brazos Valley Affordable Housing Corp. (Texas)

Bread for the World – South Dakota chapter

California League of United Latin American Citizens (LULAC)

California Reinvestment Coalition

Californians for Economic Justice

CALPIRG

CAMEO – California Assoc for Micro Enterprise Opportunity

Center for Economic Integrity

Center for Responsible Lending

Coalition for Humane Immigrant Rights (CHIRLA) (California)

Color Of Change

Community Economic Development Association of Michigan

Community Legal Services, Inc. of Philadelphia

Connecticut Legal Services, Inc.

ConnPIRG

Consumer Action

Consumer Federation of America

Consumer Justice Law Center LLC (Wisconsin)

Consumer Reports

Consumers for Auto Reliability and Safety (California)

CoPIRG

Delaware Community Reinvestment Action Council, Inc.

Delaware Manufactured Homeowners Association Demos

DOVE, Inc. (Massachusetts)

East Bay Community Law Center (California)

Empire Justice Center (New York)

Evangelical Lutheran Church in America

Faith in Action

Florida Alliance for Consumer Protection

Florida Consumer Action Network

Florida PIRG

Georgia PIRG

Georgia Watch

Heartland Alliance (Illinois)

Heartland Center for Jobs and Freedom (Missouri)

HOPE for All: Helping Others Prosper Economically (California)

Housing & Economic Rights Advocates (California)

Illinois PIRG

Indiana Institute for Working Families

Indiana PIRG

Interfaith Center on Corporate Responsibility

Iowa PIRG

Kentucky Equal Justice Center

Legal Aid Society of the District of Columbia

Legal Services of New Jersey

Main Street Alliance

Maryland PIRG

MASSPIRG

Metropolitan Christian Council Detroit Windsor

Montana Organizing Project

MontPIRG

MoPIRG

NAACP

NAACP CO-MT-WY State Conference

National Association of Consumer Advocates

National Consumer Law Center (on behalf of its low income clients)

National Fair Housing Alliance

NCPIRG

Neighborhood Partnerships (Oregon)

New Economics for Women (California)

New Economy Project (New York)

New Jersey Citizen Action

NHPIRG

NJPIRG

NMPIRG

North Carolina Justice Center

North Dakota Economic Security and Prosperity Alliance

Ohio PIRG

Oregon PIRG (OSPIRG)

PennPIRG

Person County Habitat for Humanity (North Carolina)

PIRG in Michigan (PIRGIM)

Policy Matters Ohio

Portland Community Reinvestment Initiatives, Inc. (Oregon)

Public Counsel (California)

Public Good Law Center

Public Justice Center (Maryland)

Public Law Center (California)

RIPIRG

SC Appleseed

SD Bread for the World

Shaw University Divinity School (North Carolina)

Small Business Majority

South Carolina Appleseed

South Carolina Christian Action Council, Inc.

Southern Arizona Grandparent Ambassadors

Statewide Poverty Action Network (Washington)

Tennessee Citizen Action

Texas Appleseed

TexPIRG

The Leadership Conference on Civil and Human Rights

The Ohio Council of Churches

Tzedek DC

U.S. PIRG

Virginia Organizing

Virginia Poverty Law Center

VOICE OKC (Oklahoma)

Voices for Children in Nebraska

WASHPIRG

Wesley Memorial UMC (Virginia)

Western Center on Law and Poverty (California)

WISPIRG

 

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