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Consumer groups hope the FDIC will crack down on rent-a-bank schemes


A bank regulator appointed by former President Trump steps down today. Consumer groups say that's a chance for the government to crack down on online lenders who charge interest as high as 200%. NPR's Chris Arnold explains.

CHRIS ARNOLD, BYLINE: A couple years ago, Sarah Ahmed (ph) needed about $2,000. She'd just moved from Iowa to Tampa, Fla., and she needed to rent a new apartment and get her young son set up in an after-school program.

SARAH AHMED: So I was just kind of running a little close to the red just between moving, finishing, like, furnishing my place and getting it ready for my son.

ARNOLD: Ahmed says she tried getting a loan from a regular bank, but with her student loan debt, she couldn't qualify. So she started looking around online, and she found a lender called Personify Financial willing to loan her $2,300, and she could pay it back over two years. So she sent in her pay stubs, her financial info. Then she says, they told her what the interest rate would be.

AHMED: That was when they shared with me that it was, like, 98%.

ARNOLD: Ninety-eight percent annual interest.

And were you a little nervous about, you know, taking out a loan with a 98% interest rate?

AHMED: Of course, yeah.

ARNOLD: And typically, interest rates that high are illegal in most states, including Florida, where Ahmed lives. Lauren Saunders is an attorney with the National Consumer Law Center.

LAUREN SAUNDERS: Florida limits interest rates to about 31% on a $2,000 loan.

ARNOLD: OK, so then how can online lenders make loans with rates way higher than that?

SAUNDERS: We call this a rent-a-bank scheme.

ARNOLD: Rent-a-bank because online lenders like Personify Financial are not banks. Normally, they'd be bound by the state interest rate caps. But Saunders says they get around those by partnering up with small banks that most people have never even heard of.

SAUNDERS: Banks are exempt from most state interest rate laws, and so predatory lenders have found that they can find a rogue bank, launder their loan through the bank, call it a bank loan and claim that it's not subject to the state interest rate limit.

ARNOLD: Saunders says the vast majority of banks do not gouge people this way on loans. But her nonprofit has identified a handful that are in these rent-a-bank schemes with more than a dozen online lenders. Her rough estimate is, together, they've loaned out more than a billion dollars in recent years. So consumer groups hope that after the current head of the Federal Deposit Insurance Corporation steps down this week, the agency will rein in those banks. Sarah Ahmed's loan with that 98% interest rate came from a bank based in Utah called First Electronic Bank.

AHMED: Very little was going towards the principal balance. Most of it was going towards the interest, which was obviously devastating. I was working my butt off, and it was like I wasn't making any progress.

ARNOLD: A year later, her loan documents showed she'd paid $2,000 just in interest and still owed $1,500 on the principal. Lauren Saunders says First Electronic Bank actually just has one physical bank branch, but it makes these high-interest rate loans across much of the country through this rent-a-bank scheme.

SAUNDERS: It does normal things out of the branch, but it also has this side business of laundering loans for predatory lenders.

ARNOLD: First Electronic Bank declined an interview. It said in a statement that it complies with the law and that it gives people access to loans when they need them, even if they have no credit history or in the past have had credit problems. The online lender that initiated the loan with Sarah Ahmed, Personify Financial, also declined an interview but said in a statement that it helps smaller banks make more credit available to borrowers. For her part, Ahmed worried that she was going to have to keep paying thousands of dollars more in interest on that loan.

AHMED: It was like I asked for help to dig out of this hole and just created a deeper hole for me to inhabit. Like, I felt stuck.

ARNOLD: Eventually, though, she got unstuck and out of the hole. She paid the loan back with help from a nonprofit that gave her an affordable loan with a much lower interest rate. So now she can spend more of her paycheck on things like enrolling her son in soccer. She just bought him cleats and a uniform. Chris Arnold, NPR News. Transcript provided by NPR, Copyright NPR.

NPR correspondent Chris Arnold is based in Boston. His reports are heard regularly on NPR's award-winning newsmagazines Morning Edition, All Things Considered, and Weekend Edition. He joined NPR in 1996 and was based in San Francisco before moving to Boston in 2001.