Frederick Sims, a disabled veteran and a senior living in California, has been repaying a loan at an unconscionable 160% annual interest rate.
Markisha Swepson, a restaurant owner in New York, is at risk of foreclosure because a company named World Business Lenders is charging her an annual interest rate of 268% on small-business loans totaling $67,000.
Ramanjeet Kaur and Kulwinder Singh Uppal, a couple who owned a small restaurant supply distributor in the Boston area, are immigrants with limited knowledge of English. World Business Lenders pulled them into a loan with a rate above 90%. To get out from under this crushing debt, the couple sold its home.
These are but a few of the horrific experiences of people harmed by a “rent-a-bank” lending scheme that is poised to spread across the country. These schemes are designed to circumvent state usury laws.
Federal bank regulators permitted, even encouraged, this legal evasion during former President Donald Trump’s administration. These regulators continue to do so now — even with a new administration.
Congress can stop the expansion of this predatory lending. Failure to do so will cause significant hardship, curtail economic liberty, and hold back President Joe Biden’s drive for racial and economic justice.
The rent-a-bank scheme is a new trend in the ancient practice of usury. Under this setup, a lender that is not a bank, such as World Business Lenders, forms a superficial partnership with a bank, such as Axos Bank, to charge interest rates beyond what state laws allow non-banks to charge. The non-bank lender is typically marketing, managing, and maintaining the predominant economic interest in the loan.
Underlying this scheme is the fact that chartered banks are generally exempt from state interest rate caps. In this arrangement, a bank rents its name and charter to a non-bank lender for a fee, which the non-bank pays so as to stay clear of state usury laws.
Non-bank financial firms such as OppFi thus collude with rogue banks such as FinWise Bank in about a dozen different schemes to issue triple-digit interest rate loans. Predatory financial practices such as these consistently inflict disproportionate harm on black and Latino communities, which are frequently their targets. This, in turn, widens the racial wealth gap.
When lawsuits have been filed, courts have consistently ruled against the sham partnerships, using the “true lender” doctrine to identify who is really behind the loan. Since the true lender is the non-bank lender, courts have found these loans are subject to state usury limits.
An earlier iteration of rent-a-bank ended in the early 2000s, when federal bank regulators played a leading role in shutting them down.
By contrast, regulators appointed by Trump have strongly supported the loan sharks. The Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation rebuffed calls from Congress and advocates to stop the subterfuge. This shows how immensely important it is for Biden to nominate a permanent, pro-consumer head of the OCC, especially as he or she would be a crucial voting member on the FDIC Board of Directors.
In 2019, the OCC and FDIC filed an amicus brief claiming that it was legitimate for a small business in Colorado, Rent-Rite Super Kegs, to be charged a 120% annual interest rate on a $550,000 loan, far beyond the state’s rate cap.
The OCC last year released a rule that guts the long-standing true lender doctrine. If the loan document merely claims that the bank is the true lender, then the rule would recognize it as such — even if the bank is merely a front for another lender. This deceptive regulation is most accurately called the “fake lender” rule.
Interest rate caps are overwhelmingly popular and have been enacted by nearly every state in the country to protect consumers. If allowed to take hold, the rule would defang these state laws and facilitate the expansion of high-cost loans.
Congress can prevent their proliferation by rescinding the fake lender rule through the Congressional Review Act. This law allows for Congress to eliminate a recently promulgated regulation with just a majority vote in both chambers and the president’s signature. However, legislation to nix the rule must pass within the next days to meet a fast-approaching deadline. More than a dozen Congressional Review Act resolutions were enacted under Trump.
As my organization has pointed out, “High-cost lending is a debt trap by design, exploiting the financially distressed, and leaving them unable to pay other bills and facing high checking account fees, closed bank accounts, and bankruptcy. These toxic products inflict turmoil pervading every aspect of a person’s life.” They affect a person’s health, family life, and ability to retire.
Congress can save people from this fate by repealing the fake lender rule without delay.
Mike Calhoun is president of the Center for Responsible Lending, a nonprofit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices.
