PHILADELPHIA–A new analysis from The Pew Charitable Trusts offers a demonstration of how payday lenders are partnering with FDIC-supervised banks to issue loans that bypass state laws and consumer safeguards in states that prohibit payday lending or allow it with consumer safeguards in place.
According to Pew, the analysis highlights how the high-cost third-party lending arrangements, better known as rent-a-bank, are leading to higher costs and consumer harm instead of expanding access to better credit.
In an issue brief, Pew said it reviewed how consumers in four states— Colorado, Hawaii, Ohio, and Virginia— have saved hundreds of millions of dollars in fees while keeping access to credit after passing comprehensive payday loan reforms. However, some payday lenders without state licenses are using rent-a-bank partnerships to bypass state consumer protections.
Pew noted some states have sued or threatened enforcement actions for violating state laws.
Click here to read the analysis in its entirety.
Comparison of Loans Issued by Payday Lenders vs. FDIC-Supervised Banks in 8 States
| State | State-licensed payday loan | Rent-a-bank payday loan | ||
| Ohio | $1,000 for 11 months | $454 cost 88% APR |
$1,000 for 11 months | $782 cost 149% APR |
| Washington | $405 for 39 days | $55 cost 126% APR |
$450 for 39 days | $125 cost 260% APR |
| Colorado | $500 for 4 months | $110 cost 101% APR |
Not disclosed | 189% APR |
| Maine | $300 for 14 days | $25 cost 217% APR |
Not disclosed | 189% APR |
| New Mexico | $1,000 for 6 months | $568 cost 175% APR |
$1,000 for 9 months | $858 cost 175% APR |
| Oregon | $300 for 1 month | $39 cost 154% APR |
$450 for 1 month | $100 cost 262% APR |
| Virginia | $1,000 for 6 months | $246 cost 86% APR |
$1,000 for 9 months | $776 cost 160% APR |
| Hawaii | $1,000 for 4 months | $216 cost 100% APR |
$1,000 for 4 months | $411 cost 184% APR |
‘Damaging Effects’
Pew said its extensive research has identified the damaging effects that unaffordable, single-payment loans have on the financial stability of many low and moderate-income consumers.
According to Pew, Americans spend more than $30 billion to borrow small amounts of money from payday, auto title, and other high-cost lenders. Payday loan borrowers end up paying an average of $520 in fees over five months in a year for an average loan of $375, Pew said.
“Consumers resort to these high-cost loans because they’re in financial distress and often living paycheck to paycheck,” Pew said. “Instead of issuing rent-a-bank loans…banks should expand credit access by offering small loans directly to checking account customers, providing safer and more affordable credit.”