Many states have laws limiting fees for payday loans, but some payday lenders partner with multiple banks to issue loans whose prices exceed these limits. With these “rent-a-bank” agreements, banks issue loans on behalf of payday lenders, even in states that ban payday loans or only allow them with collateral. The Federal Deposit Insurance Corp. oversees the six banks known to have engaged in these arrangements.
Bank leasing partnerships have resulted in loans with annual percentage rates typically ranging from 90 to 200, rates much higher than what banks typically charge or the laws of many borrowing states allow. But banks have preemptive power, which means they can issue loans under their home state’s banking laws even if loan interest rates aren’t allowed under credit laws. for consumption by the State of the borrower. Because rent-a-bank payday lenders market and manage these transactions and bear most of the risk, some states view them as the true lender and have sued or threatened enforcement action for violating state laws. .
The eight states that allow payday loans and whose banks charge as much or more than state-licensed lenders are Colorado, Hawaii, Maine, New Mexico, Ohio, Oregon, Virginia and Washington. For example, in Virginia, a car title lender – which is similar to a payday lender but guarantees loans with car titles – makes loans that it says do not have to comply with Virginia law because that they are issued by a bank based in Utah. This lender issued a three-year loan of $2,272 with an annual percentage rate of charge (APR) of 98.7% and finance charges of $4,867. This means the borrower would repay $7,139 on a $2,272 loan. For a customer with a comparable credit history, the cost to a state-licensed non-bank lender for the same loan in Virginia is approximately $1,611, three times less than bank charges through their lending partner. In title.
Competition in markets, including credit markets, generally lowers costs. However, previous research from Pew found that people looking for payday loans focus on how quickly they can borrow, the likelihood of being approved, and the ease of borrowing. Payday lenders therefore tend to compete on these factors rather than price, as their customers are in dire financial straits. The low sensitivity of borrowers to costs when they are in difficulty explains the lack of competition on personal loan prices.
Comparison of Loans Issued by Payday Lenders vs. FDIC Supervised Banks in 8 States
Rent-a-bank lenders operate on a high cost business model with high customer acquisition costs, overhead and losses. They charge high interest rates to cover these costs. But offering loans directly to current account customers is a much better way for banks to provide safer and more affordable credit, just as Bank of America, US Bank and Huntington Bank already do. Good news for consumers, Wells Fargo, Truist and Regions announced plans in January to offer new small loans. These programs can reach customers with low credit ratings who previously did not qualify for bank loans. Smaller banks can rely on technology providers to offer similar small automated loans to their customers.
This affordable credit has the potential to save billions of dollars for millions of borrowers over payday loans, and regulators are accommodating it appropriately. But high cost bank lease loans that sometimes cost even more than payday loans have no place in the banking system. The FDIC should shut down high-risk, high-loss partnerships that result in loans that many state laws otherwise prohibit.
Alex Horowitz is a Principal Officer and Chase Hatchett is a Senior Associate of The Pew Charitable Trusts Consumer Lending Project.