Consumer groups pushing for banking regulators to crack down on so-called rent-a-bank lending for personal loans may have found a willing watchdog.
Zixta Martinez, deputy director of the Consumer Financial Protection Bureau, said at a recent consumer group conference that the agency is taking a "close look" at the lending partnerships between banks and nonbanks, which are often fintech companies.
"Some lenders employing rent-a-bank schemes have unusually high default rates, which raise questions about whether their products set borrowers up for failure," Martinez said at the June 15 Consumer Federation of America’s assembly. "And our complaints database reveals a range of other significant consumer protection concerns with certain loans associated with bank partnerships.”
Through rent-a-bank partnerships — or what industry proponents would call marketplace lending arrangements — consumer advocacy groups say lenders are wrongly dodging state interest rate caps and offering loans with annual interest rates sometimes exceeding 100%.
“Most states have interest rate limits that apply to certain types of loans, but they generally don't apply to banks” because of exemptions for institutions under federal supervision, said Lauren Saunders, associate director at the National Consumer Law Center. “So a few predatory lenders are trying to evade state interest rate limits by laundering their loans through a bank, calling it a bank loan and claiming that they don't have to comply with the law.” The NCLC believes the nonbank should be considered the lender and held to the rate caps in the state it is lending, regardless of where the partner bank is located.
While light on details to this point, the CFPB’s scrutiny could bring fresh regulatory firepower to an arrangement that has allowed some fintech lenders to grow and, as the industry sees it, serve customers overlooked by traditional creditors. Consumer advocates counter that such access comes at onerous terms with high default rates.
The NCLC has identified nine companies partnered with six federally-supervised banks to distribute loans at rates that exceed 100% in states outlawing such interest. All but seven U.S. states have laws capping interest rates on personal installment loans, typically at no more than 40%, according to NCLC.
If this issue sounds familiar, it's because Congress last year took action against this type of lending relationship, voting in June 2021 to overturn the Office of the Comptroller of the Currency’s True Lender rule. The provision, passed in the final months of the Trump administration, said that any bank that signs a loan document should be considered its true lender for regulatory purposes, even if the loan is serviced by or sold to a high-interest lender.
That repeal did not outright ban such arrangements, but consumer groups say it led to the OCC taking a stricter stance on the partnerships. The groups have more recently focused on getting the Federal Deposit Insurance Corporation, which has authority over some 5,000 state-chartered banks, to prevent rent-a-bank deals. The FDIC in 2020 updated a rule it calls “valid when made,” which finds that the proper interest rate for a loan is determined when that loan is made, regardless of if it is sold afterward.
The NCLC led a group of 15 other consumer and civil rights groups that wrote to the FDIC in February highlighting “rogue banks” it said were violating state usury laws.
The CFPB could bring fresh eyes to the space. It has previously only challenged lending partnerships in the context of tribal lending, as noted in recent client guidance from attorneys with the law firm Troutman Pepper.
“I don’t know yet exactly what the CFPB is looking at,” said the NCLC’s Saunders, “but I think there is fertile ground to examine whether they're complying with the law, and whether they're committing unfair, deceptive and abusive practices that harm consumers.”
Part of CFPB’s mandate is to investigate unfair, deceptive or abusive acts or practices, or UDAAP. The agency in March updated its internal guidance for examining practices for unfairness.
“They may look at things like: How much revenue is being generated off this?” said Stefanie Jackman, a partner at Troutman Pepper. “How is that shared between the bank and the nonbank? What other things are the nonbanks doing? Trying to quantify whether, on balance, this relationship is benefiting the nonbank in a way that, by the CFPB’s standards, is problematic.”
In the meantime, there has been plenty of recent action in courts on the issue. Earlier this month, a Texas resident filed a class-action lawsuit in federal court against Opportunity Financial, or OppFi, alleging that the fintech lender is evading the state’s usury law by offering loans between $500 and $4,000 with interest rates up to 160%.
OppFi denies wrongdoing. “It is well-settled federal law that permits state-chartered banks to export to out-of-state borrowers the interest rate permitted by the state in which the bank is located, and to preempt the contrary laws of such borrowers’ states,” CEO Todd Schwartz said in an emailed statement.
OppFi, which is publicly traded and last year originated just under $600 million in loans, is based in Chicago and lends directly in four states and in 32 others through partnerships with the Utah-based banks FinWise, First Electronic and Capital Community.
Schwartz said in the email that OppFi provides services to “state-regulated, FDIC-insured banks to help them provide affordable and safe loans to millions of everyday consumers who lack access to traditional credit products.”
OppFi is also engaged in a legal battle with California financial regulators. In March, the company filed a lawsuit in California state court seeking a declaration that California’s 36% interest rate cap does not apply to loans that are “originated by OppFi’s bank partners and serviced through the OppFi technology platform.” A month later, California filed a cross-complaint accusing OppFi of offering loans that illegally exceed the state’s interest rate cap.
The CFPB has, as expected, taken a more aggressive stance toward banking and the fintech industry under director Rohit Chopra, who was confirmed to the role in October. The agency in May published guidance for how states can enforce provisions of the federal Consumer Financial Protection Act on their own. Its statements could therefore hold sway over how state regulators approach issues like lending partnerships.
“What is clear is that regulators are interested in this model,” Jackman said. “This is an important time for the industry to help regulators understand what types of financial products this facilitates and how those are needed.”
