How some online lenders are avoiding state laws to charge triple-digit interest rates: NPR

Online lenders charging triple-digit interest rates circumvent state laws prohibiting such loans. The money is funneled through banks that are not state-regulated to circumvent the rules.


Consumer watchdogs say online lenders are circumventing state laws that prohibit loans with very high interest rates, some over 100%. Lenders say they’re doing nothing wrong, but advocates say these loans are predatory and are calling on federal regulators to crack down. NPR’s Chris Arnold reports.

CHRIS ARNOLD, BYLINE: Okay, let’s say I’m an online lender charging 100% interest rates. Things are working pretty well for me here. I make money. But then the state of California passes a new law capping interest rates for many loans much lower – at around 38%. What do I do? Well, if I can find a partner – a real bank, that’s not subject to the State of California rate cap – the loan money goes through that bank – and boom – I can get around the rate.

LAUREN SAUNDERS: That’s right. I mean, it’s almost like money laundering, right? It’s laundering, you know, basically the source of the money and the source of the loans.

ARNOLD: This is Lauren Saunders, attorney at the National Consumer Law Center. She says many of these online lenders use what she calls bank leasing programs. This allows them to circumvent state law because there is no federal cap on interest rates and most banks are not subject to state rate caps. Saunders says it can work in different ways, but the simple version is this. The online lender basically does all the work of finding the customers, approving the loans, collecting them, but just when someone gets a loan…

SAUNDERS: When the money actually goes to the consumer…

ARNOLD: This money comes from a bank that is not covered by interest rate limits. So she says the online lender immediately redeems the loan from the bank.

SAUNDERS: So it’s not really a bank loan. They are simply using the banks as a fig leaf to make very expensive loans – 160% interest – in states where such loans are illegal.

ARNOLD: Saunders says a lot more people are taking out loans online these days, and lenders are avoiding rate caps in 25 states. So she and 60 other consumer protection and civil rights groups sent letters to federal regulators, asking them to get tough. It seems clear that online lenders are avoiding state rate caps. In an earnings call before the California law was passed, Elevate Credit Inc. spoke openly about it. Acting CEO Jason Harvison talked about working with banks to get around rate caps.

JASON HARVISON: Similar to our recent experience in Ohio, we anticipate being able to continue to serve California consumers through our banking sponsors who are not subject to the same rate limitations offered at the state level.

ARNOLD: Online lenders, however, argue that they are doing nothing wrong. Elevate tells NPR in a statement that the letters from the consumer groups, quote, “roughly describe our activities and intentions,” and that the company says its relationship with outside banks is in full compliance with all federal laws. So is it illegal or just inappropriate or just a creative way to continue to serve your customers?

ADAM LEVITIN: We currently have a system that doesn’t make sense.

ARNOLD: Adam Levitin is a law professor at Georgetown University. He says ongoing lawsuits will likely help determine where the legal line is here. And he says Elevate, for example, does more sophisticated partnerships, which might be more legally defensible. So instead of the simple bank rental program, in Elevate’s case, you might want to hook your brains here.

LEVITIN: The bank keeps the loan but sells a derivative interest in the loan – a 90% derivative interest – to an entity associated with Elevate.

ARNOLD: If it’s confusing, don’t worry. Levitin says the fact is that this whole convoluted structure is put in place to circumvent the state rate cap. And he says the underlying problem is that some lenders have to play by one set of regulations, and banks have to play by another set of rules.

LEVITIN: The best way to do that would really be to have a national usury law.

ARNOLD: In other words, a national rule that all lenders should follow. And today in Congress, lawmakers introduced a bipartisan bill to establish a national interest rate cap of 36%. Active duty military already have this protection. Some legislators want to extend it to the rest of the country. But many financial companies are likely to lobby against this.

Chris Arnold, NPR News.

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