Consumer groups say that high-interest lenders — who issue such things as payday or car title loans — are using a novel way to evade state interest rate caps nationally: They partner with banks in Utah, which puts no limit on rates.
In what the groups call a “rent-a-bank scheme,” such lenders solicit, structure and collect on loans that charge up to 222% annual interest — but their partner banks in Utah technically issue or hold the loans to evade caps elsewhere.
Groups attacked the partnerships in congressional testimony Wednesday along with three Utah banks they say are involved: FinWise, Capital Community Bank and TAB Bank.
“The rogue banks that enable these schemes clearly feel comfortable that today’s regulators will turn a blind eye to this misuse of the bank charter,” Lauren Saunders, associate director of the National Consumer Law Center, testified to the House Financial Services Committee.
Committee Chairwoman Maxine Waters, D-Calif., said that’s because the Trump administration has proposed rule changes that make the interest cap evasion easier, including making clear that a loan sold by a bank to another institution will carry the initial interest rate issued.
“American consumers used to be able to look to their regulators to protect them from these kinds of predatory schemes,” Waters said. “Not so under the Trump administration, where consumer protection takes a back seat to consumer predation.”
Saunders said most states impose interest rate caps for nonbank installment loans — and the average cap among the 45 states that would limit interest on a $500, six-month loan is a 37.5% annual percentage rate.
But she said rent-a-bank partnerships are allowing rates generally between 100% and 160% APR.
“We are now seeing an alarming explosion of blatant high-cost rent-a-bank schemes,” she said, and warned that more may come unless regulators act or Congress passes a proposal to limit interest nationwide to no more than 36% APR.
The Utah connection
Saunders and Graciela Aponte-Diaz, director of federal campaigns for the Center for Responsible Lending, identified six banks nationally involved in such partnerships, three of them in Utah.
The two outlined what they said are some of the dealings of the involved Utah banks:
Capital Community Bank works with ChoiceCa$h (Loan Mart) to issue car title loans with up to 222% APR in 16 states and the District of Columbia.
TAB Bank works with EasyPay Finance for loans for auto repairs, furniture, home appliances, pets and wheels and tires with up to 189% APR in 30 states.
FinWise Bank works with Elevate’s Rise brand to issue consumer installment loans with annual interest rates between 99% and 149%.
FinWise partners with OppLoans for consumer installment loans at up to 160% APR.
“Only a small number of banks are involved," Saunders testified, “but they have a big impact.”
Aponte-Diaz added, “High-cost lending is a debt trap by design, exploiting the financially distressed and leaving them worse off.”
‘To help people’
FinWise Bank issued a written statement that its small-dollar lending program “is designed to provide a responsible, regulated credit product to solve consumers’ short-term needs while providing an opportunity for consumers to improve their credit rating.”
It said the term rent-a-bank “is used by detractors of the model and implies that banks passively allow the use of their charters to sidestep state laws. The reality: FinWise and other Utah banks are active participants in these structures and are closely scrutinized by state and federal regulators who ensure consumer protection laws are being adhered to.”
FinWise also said its small-dollar lending “should not be confused or associated with payday loans,” adding that its loans are “designed to help people avoid debt traps.”
Capital Community Bank and TAB Bank did not immediately respond to requests for comment.
Paul Allred, deputy commissioner of the Utah Department of Financial Institutions, said his agency has received no complaints about the so-called rent-a-bank partnerships.
He said it has received inquiries from other states’ bank regulators about third-party partnerships that Utah banks have, and it has shared information with them.
Allred says his agency does not comment about specific banks and their operations unless it has issued a formal order about problems. “There are no orders currently out there that deal with these bank partnerships.”
Shaun Barrett, the Utah agency’s director of industrial banks, added, “Banks are examined on a cycle. At every exam, we reassess the products and the partners that the bank has chosen to align themselves with. … When we find weaknesses, we criticize.”
Allred added that most of those findings are confidential to keep trust in banks. “We work with them to repair and correct and set a new course if we think they are off course.”
Utah once had interest rate caps, but they were lifted in the 1980s. That was seen as one reason for the rise of payday lenders in Utah. Various attempts have been made over the years to restore some caps, but all were defeated amid opposition, especially from payday lenders, which have been a major source of campaign donations to many Utah politicians through the years.
A recent state report said payday loan companies in Utah last year charged an average 522.26% APR, or $10.02, for a $100 loan for seven days. The highest rate charged by a Utah payday lender last year was 2,607% APR, or $50, on a $100 loan for seven days.