*First appearing in CUInsight.com
The battle continues in the financial services sector to eradicate predatory payday lenders in the United States. Despite a strong number of individual states’ gains in recent years to cap payday loans’ annual percentage rates (APRs), payday lenders manage to live to survive another day. Only now they have help – from rogue institutions termed “rent-a-banks.”
A rent-a-bank by any other name
A couple years ago, Sarah Ahmed needed $2,000. Moving from Ohio to Tampa, Fla., Sarah had to move quickly, rent a new apartment, and get her young son set up in an after-school program. As reported by Chris Arnold for National Public Radio (NPR), things didn’t start well. Ahmed tried to get a loan from a regular bank, but considering her student debt, she didn’t qualify.
Unfortunately, she began looking online, eventually coming around to a lender who – while probably deserving to be put on blast – we’ll refrain from naming. This online lender was willing to offer her $2,300 to be paid back over the next two years. Then they proceeded to tell her the interest rate.
“That’s when they shared with me that it was, like, 98 percent.”
Spot the problem already? So do we. Typically, interest rates that high are now illegal in most states in the Union, including Florida. In fact, the Sunshine State limits interest rates to 31 percent on a $2,000 loan.
Then how do lenders – online or storefront – concoct loans that greatly exceed the state rate cap? “We call this a rent-a-bank scheme,” says Lauren Saunders, an attorney with the National Consumer Law Center (NCLC).
In a non-predatory system, these payday loan businesses would be bound by the state interest rate caps. Yet Saunders says they can skirt such rules by partnering with small banks most people have never heard of to offer outrageous rates they know many applicants can’t afford.
“Banks are exempt from most state interest rate laws, and so predatory lenders have found that they can find a rogue bank, launder their loan through the bank, call it a bank loan and claim it’s not subject to the state interest rate limit,” Saunders explains.
A partnership of convenience for payday lenders and rent-a-banks
These particular rent-a-bank loans are available because banks are only required to adhere to the interest rate limits of their individual state instead of the applicant’s state. So just over a handful of banks now originate loans on behalf of predatory payday lenders at interest rates far higher than the applicants’ home states authorize, with the lenders only able to approve the loans due to the banks’ charters. Funny-not-funny that these loans are more or less similar to the broad-based payday loans provided to non-customers that regulators have typically stopped.
Saunders says that the majority of banks don’t gouge their customers like this on loans. Her nonprofit, the NCLC, however, has pointed out about a half-dozen that are involved in such rent-a-bank schemes with more than a dozen online lenders. She estimates that, together, such lenders have loaned out roughly more than a billion dollars in the last few years.
And Sarah was yet another victim of these predatory loans and the banks who perpetuate the fleece. In fact, “Very little was actually going towards the principal balance,” Sarah says. “Most of it was going towards the interest, which was obviously devastating. I was working my butt off, and it was like I wasn’t making any progress.”
A year into paying off the loan, her loan papers revealed she paid $2,000 on the interest alone while still owing $1,500 on the principal. Lauren Saunders discovered the bank partner in question only has one physical branch location, yet it makes these abusive high-interest rate loans across the U.S. through this rent-a-bank swindle. “[The bank] does normal things out of the branch, but it also has this side-business of laundering loans for predatory lenders,” clarifies Saunders.
“It was like I asked for help to dig out of this hole and just created a deeper hole for me to inhabit,” Sarah said. “I felt stuck.”
Rent-a-banks the money, payday lenders the scam
Sarah and her challenges are no different than the 12 million individuals who take out payday loans each year. On some level they have to trust the business to follow through on their claim to float the customer the needed cash before, say, the customer’s next paycheck – except that so many times it utterly fails to work that way. Like Sarah, the interest on the loan ends up costing more than the principal itself. That’s where the vile debt trap rears its ugly head. Thousands of dollars later, the predatory lender decides it’s time to release you.
No one can blame Sarah for seeking a loan; unfortunately, like 12 million other underserved consumers, she either didn’t realize the corrupt predatory business model she was dealing with, or her financial literacy skills could use some adjustments. Chances are it’s both.
A sizable percentage of the underbanked population simply distrusts the mainstream financial system, especially among minorities across the country and communities located in so-called banking deserts. According to an FDIC survey, the second-most commonly cited reason that unbanked households don’t pursue accounts in the financial mainstream is that they have no faith in the U.S. banking system.
So when consumers like Sarah need speedy, accessible means to fast-cash, she may have seen the blink-blink, blinkety-blink of the neighborhood storefront lender or the web page of an easy-to-access online presence. Sometimes that’s all it takes.
Financial well-being? Thy way is the credit union
All the while, nationwide polls like CUNA and Gallup prove that credit unions are safer, more supportive financial institutions, and overwhelmingly better at improving financial well-being for their members than banks. “It’s incredible to see that the average consumer, who knows how hard it can be to make their money work for them, recognizes credit unions as the best partner to keep them financially well,” said CUNA Chief Economist Mike Schenk, “The data has been there to show the billions of dollars credit unions return to members and their communities, but it’s very meaningful to see folks recognize credit unions as a force for good.”
They are especially good when they partner with the kinds of member-owned cooperatives whose mission it is to benefit members’ lives instead of working behind your bank – sorry, BACK – with nefarious lenders whose very business models are predicated on fleecing you out of your hard-earned money.
Rather than Sarah Ahmed logging into a payday lending website or walking into a storefront lender, imagine her reaction to walking into a member-owned, member-accountable credit union. The cooperative’s very purpose and products are focused on working with her to offer the affordable, accessible loan she needs to finance her child’s requirements and the financial literacy counseling necessary to get her back on the path to financial health and well-being.
The difference is stark, especially when the credit union raises their game by implementing a member-focused and easily-accessible digital QCash Life Event Loan into their core. Instead of having Sarah log into an abusive debt trap with that online lender, help her log into your credit union’s app whenever, wherever she may be, apply for a safe and affordable Life Event Loan from QCash and, if approved, her loan would be deposited into her waiting account within 60 seconds.
In the end, rent-a-banks are simply more of the same, except now they have teamed up with random, smaller rent-a-banks with nothing better to do than profit off innocent, underserved consumers. Doesn’t speak well of anyone, and that includes the mainstream financial system, overall.
As for Sarah Ahmed, you ask? She eventually got “unstuck” and out of the debt trap. She paid off the principal with help from a nonprofit that gave her an affordable loan at a much lower interest rate. Now she can spend more of her hard-earned paycheck on such needs as enrolling her son in soccer.
