WASHINGTON, D.C. – Today, the Center for Responsible Lending (CRL) Director of Federal Campaigns Graciela Aponte-Diaz testified before the full House Financial Services Committee for a hearing entitled: Rent-A-Bank Schemes and New Debt Traps: Assessing Efforts to Evade State Consumer Protections and Interest Rate Caps.
CRL and other consumer and civil rights organizations have underscored their concerns about rent-a-bank schemes to the Office of the Comptroller and Currency (OCC) and Federal Deposit Insurance Corporation (FDIC)—warning the agencies that this loan laundering scheme enables predatory loans of 100% APR or higher in states that prohibit high-cost loans. In addition to unsecured consumer installment loans, it appears the scheme is also enabling triple-digit interest mortgages and small-business loans.
Additionally, several consumer and civil-rights groups submitted a comment letter to the FDIC strongly opposing the federal banking regulator’s proposal, which risks green lighting triple-digit rent-a-bank schemes.
The Center for Responsible Lending, National Consumer Law Center, Leadership Conference on Civil and Human Rights, NAACP, National Association for Latino Community Asset Builders, Americans for Financial Reform, Consumer Federation of America, U.S. PIRG, Consumer Action, National Association of Consumer Advocates, and the National Coalition for Asian Pacific American Community Development (National CAPACD), urge the FDIC to withdraw its proposal in its comment letter.
In the 1990s-mid 2000s, predatory lenders partnered with banks to evade state interest rate caps. In response, federal bank regulators -- the FDIC, Federal Reserve Board, and OCC -- cracked down on this practice. Now, under the Trump Administration, this scheme is reemerging and going unchecked. The FDIC and OCC have even issued proposed rules that could bless this practice, allowing predatory lenders to issue loans of more than 100% APR in states that have interest rate caps of much less, often around 36%.
Below are Aponte-Diaz’s oral remarks as prepared for delivery:
Good morning Chairwoman Waters, Ranking member McHenry, and members of the committee.
My name is Graciela Aponte-Diaz and I am the Director of Federal Campaigns for the Center for Responsible Lending.
CRL is a non-profit, research and advocacy organization dedicated to protecting homeownership and family wealth by fighting predatory lending practices.
For nearly 20 years, I’ve dedicated my career to fighting for low-income families and communities of color.
I myself grew up “low-income” with a single mom trying to make ends meet. Luckily, she was never a target of abusive payday or high-cost installment loans because she lives in Maryland--- a state that bans these products.
In fact, sixteen states, plus the District of Columbia do NOT allow payday loans. And the vast majority of states have interest rate caps on installment loans.
Active duty service members are also protected from predatory loans through the bipartisan Military Lending Act.
Unfortunately, some lenders have found a way to continue to target vulnerable consumers, despite state laws, through “Rent-a-Bank” schemes.
Here’s how a “Rent-a-Bank” scheme works:
- A predatory “non-bank” lender decides that they want to lend at higher rates than what is allowed by state law, frequently loans of 100% APR or more, even in states that have a 36% interest rate cap or less.
- They find a bank that is willing to originate the loans, because national and federally-insured banks are exempted from state interest rate laws.
- After the loan is processed, the bank sells the loan or receivables back to the non-bank.
- The non-bank handles marketing, consumer interactions, and servicing.
- The non-bank lender is the public face of the loan, and neither the customers nor the general public are aware of the motions behind the scenes to legitimize a loan that would otherwise be illegal.
Non-bank lenders such as Elevate, OppLoans, Enova, LoanMart, and World Business Lenders currently lend at outrageous rates in states where those rates are illegal under state law, through the use of rent-a-bank schemes with banks regulated by the FDIC or OCC.
Neither regulator appears to have done anything to shut down these abuses.
I’d like to share three examples of high-cost loan documents that I have seen first-hand and borrowers that I have worked with:
- A disabled Marine Corps veteran was targeted for a $5,000 loan at 115% APR, and a ridiculously long loan-term of 84 months. As stated in her loan documents that resulted in $42,000 to borrow just $5,000 over 7 years. Not surprisingly, she was unable to keep up with these unaffordable payments and ended up in bankruptcy.
In another example:
- A single mother was targeted for a $2,500 loan with an APR of more than 100%. After 5 years she paid back $14,000, but was unable to save for her daughter’s college tuition.
- A Spanish-speaking man was lured into a store that said “Se habla español,” which means “We speak Spanish.” However, no one spoke Spanish and all the loan documents were in English. He walked out with a $2,700 loan at 123% APR. Worse, it was secured by the title of his truck. He had to pay back $10,000 over a 5 year term, or risk losing his only mode of transportation to work.
These are just some examples of a now too common loan that is being offered online or through storefronts that are disproportionately located in communities of color. This is not access to credit or innovation, this is access to debt.
Fortunately there are ways to stop these abusive lending practices:
- First, we need the FDIC and OCC to take enforcement actions against these predatory lenders that are using “rent-a-bank” schemes and offering illegal loans in states with rate caps.
- Second, the FDIC and OCC should rescind their proposed rule that does nothing to address this abuse and in fact, emboldens more predatory lenders to engage in rent-a-bank schemes.
- Third, Congress should swiftly pass HR 5050, a 36% interest rate cap bill for veterans and all consumers.
- Finally, the FDIC should preserve its 2005 payday loan guidelines; its 2007 guidelines advising a rate cap of 36%, and its 2013 guidelines advising ability-to-repay for bank payday loans.
Let me thank the committee again for the opportunity to address these scams and the real-life harmful consequences. I look forward to your questions.
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