SACRAMENTO, Calif.–Rent-a-Bank schemes continue to proliferate even as states work to cut down on high-cost lenders, according to a new report.
Case in point: California, where a law went into effect in 2020 that caps interest rates at 37% for some consumer loans. But one lender, OppLoans, is charging 160% on a typical loan in California, according to its website, using a partnership with a Utah bank to continue selling in the state despite the new rules, according to an analysis by the Wall Street Journal.
OppLoans isn’t the only lender charging triple-digit rates in California, the Journal reported, saying it ran 25 online searches in February within the state for loans for a financially stressed borrower. The top results included several companies pitching consumer loans with rates over 100% to borrowers browsing from California, the Journal said.
“OppLoans and its partner FinWise Bank are in what is called a rent-a-bank partnership, which allows high-cost lenders to skirt interest-rate caps in dozens of states,” according to the Journal. “Rent-a-bank arrangements are the focus of a fierce battle pitting state regulators and consumer advocates against the credit industry.”
How Scheme Works
The Journal said the scheme typically works like this: A lender such as OppLoans helps identify borrowers to whom it wants to lend at rates above what their states permit. “It makes a deal with a bank in another state, where such rates are allowed, to put up the money. Then the bank sells the lion’s share of the loan to the lender or a company connected to the lender,” the Journal said.
Monique Limón, a Democratic California lawmaker, told the Wall Street Journal the companies “are intentionally finding ways to evade state law.” Limón said she is hopeful state regulators will take enforcement action.
A spokesman for Chicago-based Opportunity Financial LLC, also known as OppLoans, told the Wall Street Journal the company “is not intentionally evading or breaking state law.” OppLoans “provides outsourced services to…banks to help them provide loans to credit-challenged Americans,” the spokesperson added. FinWise Bank said in a statement to the Journal it is an “active participant” in its partnerships with loan companies, and its underwriting takes into account borrowers’ ability to repay the debt.
35-Million Person Market
The lenders are the roughly 38 million U.S. consumers have subprime credit scores below 600, according to FICO, the Journal said.
“Under a typical rent-a-bank arrangement, the high-cost lender helps market the loan but its partner bank advances the money. The bank then sells a majority stake in the loan—90% or more—back to the high-cost lender or an affiliated entity, meaning the high-cost lender benefits from most of the repayments and bears most of the cost of loan losses,” the Journal reported. “The companies say the banks are the lenders and therefore the laws that apply are those of the state where the loan was originated, not the laws of the borrower’s state.”
As another example, the Journal cited Elevate Credit Inc., which uses a rent-a-bank model that sends loan repayments from struggling borrowers in Nebraska to a Caribbean tax haven.
“Elevate’s Rise loans in 18 states and D.C. are originated by FinWise, according to Elevate securities filings,” the Journal reported. “The bank then sells a 96% interest in the loans to a Cayman Islands special-purpose vehicle called EF SPV Ltd., which is counted as part of Elevate for accounting purposes. This offshore company borrows to fund the loan purchases, paying a rate at end-2019 of just over 10%, compared with the 99% to 149% it collects on the typical Rise loan, the filings show.”
Portrayal Not Fair, Banks Say
Banks involved in the partnerships told the Journal the “rent-a-bank” label unfairly portrays them as passive participants, when they are actively involved in underwriting and other aspects of the loans. “We don’t say, ‘Here you go, you can use our charter,’” Mike Watson, chief executive of Capital Community Bank, known as CCBank, told The Journal.
Utah-based CCBank has a partnership with LoanMart, one of the largest car-title lenders in California. CCBank originates ChoiceCa$h title loans, secured on borrowers’ cars, that are marketed by LoanMart in stores. Rates in California on these loans go up to 94%, according to the companies, the Journal said.