FDIC Finalizes Rule Allowing Online Lenders to Use Banks to Charge Triple-Digit Interest Rates in States with Rate Caps

Strategic Insights -

The Federal Deposit Insurance Corporation (FDIC) has finalized a rule that allows online non-bank lenders to launder their loans through banks, enabling them to charge triple-digit interest rates in states where high rates are illegal. This move has been strongly opposed by consumer advocates, including the Center for Responsible Lending, National Consumer Law Center, and Americans for Financial Reform Education Fund. The rule was also criticized by a bipartisan group of attorneys general and dozens of community, consumer, civil rights, faith, and small business organizations, which may face legal challenges.

The FDIC's rule is similar to one finalized by the Office of the Comptroller of the Currency (OCC) last month. The rule allows banks to sell, assign, or transfer loans with interest rates permissible prior to the transfer continuing to be permissible following the transfer. However, a recent Colorado court ruling rejected this argument, finding that an online lender had to comply with Colorado's interest rate limits.

Key Takeaways:

  • The FDIC's rule will enable online non-bank lenders to use banks to charge triple-digit interest rates in states with rate caps, potentially harming low-income families and individuals of color who are disproportionately affected by predatory lending.
  • At least 45 states and the District of Columbia cap rates on many installment loans, making it essential to prevent lenders from evading these regulations.
  • Rebecca Borne, senior policy counsel at the Center for Responsible Lending, stated that the FDIC has "let its banks help predatory lenders charge up to 160% APR in states where that is illegal."
  • Lauren Saunders, associate director of the National Consumer Law Center, noted that "interest rate limits are the simplest and most effective protection against predatory lending, and states have limited interest rates since the founding of our nation."
  • Opploans, EasyPay, and Personify Financial charge 99% to 160% or higher, but claim they are exempt from state interest rate limits because they use FDIC-supervised banks to originate the loans.
  • NCLC's website has a Predatory Rent-a-Bank Loan Watch List that describes high-cost rent-a-bank schemes and where they operate.
  • The FDIC's rule does not address whether the bank is the "true lender," which impacts whether the interest rate is permissible even prior to the transfer.

Statistics:

  • 45 states and the District of Columbia cap rates on many installment loans.
  • Online lenders have tried to take advantage of the exemption by laundering their loans through banks.
  • Opploans charges up to 160% APR, while EasyPay and Personify Financial charge up to 99% APR.
  • Loans can reach $35,000 or more, with interest rates above 12% allowed for unlicensed lenders in Colorado and even 21% allowed for licensed lenders.
  • The FDIC's rule affects at least 45 states and the District of Columbia.

Sources:

  • Center for Responsible Lending
  • National Consumer Law Center
  • Americans for Financial Reform Education Fund
  • Federal Deposit Insurance Corporation (FDIC)
  • Office of the Comptroller of the Currency (OCC)
  • Colorado court ruling