money Consumer watchdogs raise alarms as more consumers rely on high-interest 'rent-a-bank' loans
Rhiannon Stanger, a single, 31-year-old mom with three daughters, wanted a chihuahua for her family and found one in a pet store while traveling to Miami.
The price was steep: $2,700.
Stanger knew she couldn't afford the puppy despite the pleas from her girls. She made $30,000 a year as a veterinary technician in Pompano Beach, Florida, and was a full-time online college student.
But a store employee told her about an easy installment loan option that would cost her $158 every two weeks. The offer seemed reasonable, and Stanger said she signed a loan application on a mobile tablet and was approved immediately – even though her income put her just a few thousand dollars above the poverty line.
“They made it really easy for me to get the loan,” Stanger said.
Duckie the dog was on her way home. But Stanger didn't realize the loan covering her cost came with an annual interest rate of 139%, even though Florida law generally caps interest rates at 18%.
But she said the store never gave her a copy of her contract, and when she later tried logging into the finance app, she couldn’t find it there either, nor could she find the payments she already made. She added that she couldn’t find how long it would take her to pay it all off.
When she finally did get hold of the contract, she was shocked to learn the payment plan had triple-digit interest.
Stanger said that staggering rate – illegal in most states – has prevented her from paying off the total debt even though she made enough payments to cover the $2,700 principal.
When she was unable to keep paying the bills, she said, the delinquent loan was sent to a collection agency. Her credit score has since dropped, and she can no longer fulfill her dream of buying a home.
It's been a year since Duckie's been home, and as she's grown, Stanger's noticed her body's gotten longer, her ears curved, and she's missing the signature soft spot on her skull that chihuahuas have.
Stanger believes she might have gone into debt for a dog that isn't even a chihuahua.
Triple-digit borrowing
Stanger is among millions of low-income Americans targeted for "rent-a-bank" loans – loans for purchases of a few thousand dollars that carry triple-digit borrowing rates, according to consumer watchdog groups who are sounding a warning about them. This unsecured debt, which means it doesn't require collateral like houses or cars, can include lump-sum loans or lines of credit.
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"Rent-a-bank" loans, say critics of the practice, come from banks or other financial institutions not subject to state interest-rate caps where they are headquartered. These lenders wire the money to digital lending or fintech companies, which then offer the loans to people like Stanger, handling their payments and commanding triple-digit interest rates for the borrowed money.
Those who make the loans say they are providing cash to borrowers, including some in desperate need, who can't borrow from traditional banks or credit unions because they have such low credit scores and are considered high risk.
The loans are becoming more common as low-wage earners need help paying for purchases over several installments, according to critics and supporters of the loans.
Previously, payday loans, typically a few hundred dollars lent at a high rate of interest on the agreement that they will be repaid when the borrower receives the next paycheck, had dominated the market for these borrowers, according to the Center for Responsible Lending, a watchdog group.
But that practice is being replaced.
USA TODAY found that short-term, installment loans with triple-digit rates are being offered at major retail auto body shops, furniture and appliance stores and online for those in a financial pinch or in need of quick cash for an emotional purchase like a puppy.
The Online Lenders Alliance, a Virginia-based, roughly 130-member national trade association that includes publicly traded companies, entrepreneurs and other lenders, defended the installment loans.
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The organization says its members share a common goal to "serve hardworking Americans who deserve access to trustworthy credit," and the loans go to consumers with low credit scores, known in the industry as subprime or near-prime, who often cannot obtain loans from traditional banks or credit unions because of their poor financial track record.
"The loans are risk-priced, non-collateralized loans that are being offered," said Andrew Duke, the alliance's executive director. He said about one-third of Americans have credit scores that are below prime. (659 or less).
'Harms of High-Cost Installment Loans'
The Center for Responsible Lending, a Durham, North Carolina, financial watchdog, recently raised warning flags about triple-digit installment loans when it released a study in late September called "Unsafe Harbor: The Persistent Harms of High-Cost Installment Loans."
The center said while there have been studies on payday loans, there has been little examination of the problems associated with high-cost installment borrowing.
Among the center's findings:
Unfavorable high-cost installment loan terms led most loans to be refinanced at least once, with 60% being refinanced. (Over 80% percent of payday loans, which are typically a few hundred dollars, are rolled over with another loan within 14 days, according to a different study).
Repaying high-cost loans often caused borrowers to miss payments on other obligations, resulting in additional debt or a larger financial deficit.
Lenders often profit even if the borrower ultimately defaults because of high-interest payments.
Borrowers understood that these loans hurt their credit scores and delayed wealth-building activities such as purchasing a home or car, investing in a business, or saving for retirement, but circumstances led them to believe they had no other option for meeting short-term financial needs.
The report was based on an online survey last year with 1,000 adults across the country who had taken an unsecured personal loan in 2019, 2020, or 2021.
"High-cost loans come with an exploitative cost, in fees and interest, that often far exceeds the amount borrowed, causing great harm to many borrowers," the study said.
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"We certainly know that in a bad economic environment, when it's a tough economic time, there are folks who are likely to turn to another source and we have concerns on that," said Yasmin Farahi, senior policy counsel for the center. "What we are seeing is people are worse off when they get these loans."
But the Online Lenders Alliance said the center's report reflects an "ongoing war to harm consumers by eliminating their credit access."
“If CRL were to get their way, the consumers who rely on short-term credit products to manage their finances and make ends meet would be worse off, period,” Duke said.
Justin Fisk, director of research and policy for the alliance, points to a 2015 George Washington University and Stevens Institute of Technology study that said the payoff rate is 69% on small-dollar loans.
That study, however, had different parameters than the center's findings.
For example, that 2015 study said a typical installment loan was $900 to be repaid in 12 biweekly installments over six months, and the annual percentage rate for those loans was 200% to 400%.
At least 12 million Americans used small-dollar loans in 2015, according to Howard Beales, an economist who served as the director of the federal Bureau of Consumer Protection and co-authored that report. Today, demand for those types of loans has "grown substantially," especially as online borrowing has increased, he told USA TODAY.
Farahi of the Center for Responsible Lending said its study found 3 in 4 survey participants took out short-term installment loans in excess of $1,000. And interest rates ranged from 100% to 189%, even though 34 states and the District of Columbia have limits on lending rates, known as usury caps, of 36% or lower for larger, longer-term, high-cost installment loans.
Farahi said financial companies that offer triple-digit loans get around these laws by what she calls a "rent-a-bank" scheme, which state and federal regulators should end.
"People are under these loans for a long time," she said. "This is providing access to a harmful debt trap."
Story continues below:
How 'rent-a-bank' works
The National Consumer Law Center, a Boston-based nonprofit that specializes in consumer issues on behalf of low-income people, has done extensive research on so-called "rent-a-bank" loans.
It works like this: Finance companies that provide quick, easy loans to borrowers like Stanger avoid state interest-rate caps by enlisting another bank or financial institution (often from another state) that's not subject to interest rate caps and can provide the funding to the borrower. The initial finance company then services the loan and can charge a triple-digit interest rate.
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The National Consumer Law Center has identified a handful of banks in Utah and a few other Federal Deposit Insurance Corp.-supervised banks that provide the loans.
Lauren Saunders, associate director of the center, said there are at least nine companies that have "significant rent-a-bank operations" that offer loans through multiple partners.
She said national, major lending institutions such as Bank of America or Wells Fargo don't fund these loans because of the negative publicity associated with them.
Saunders added that a few attorneys general have sued rent-a-bank operations.
She pointed to Washington, D.C., Attorney General Karl A. Racine, who announced in February that Elevate Credit Inc. as part of a $4 million settlement, would pay at least $3.3 million to refund over 2,500 consumers who were misled into high-cost loans and lines of credit.
Elevate, in a securities filing, denied it had violated any law or engaged in any deceptive or unfair practice. The company in a statement said it agreed to the settlement "in order to move forward and maintain our focus facilitating access to responsible credit options for those who need it."
Geoffrey McAdams of Indiana said he twice borrowed money from subsidiaries of Elevate starting last fall.
The first was a $2,300 line of credit, while the other was a $1,500 installment loan he said he obtained in May. Both have interest rates in excess of 100%, he said.
"The interest will keep killing me, and I'll never get out of it," McAdams said.
The 25-year-old said his job as an at-home customer service representative was outsourced in May, around the same time he began having health problems and moved in with his parents in Greenwood, a suburb of Indianapolis.
He said he's delivering food to make a few hundred bucks a month when he's feeling well enough, and he's enrolled in a credit counseling program to help him pay off his debts.
Elevate on Tuesday said the company "and the banks we support are unique among non-prime lenders in that we measure ability to repay and have consistently lowered APRs since our founding. This has resulted in average APRs dropping 20% in the last two years and more than 100,000 consumers making use of the array of no-cost payment assistance tools that Elevate offers to repay their loans."
But McAdams now questions whether he should have borrowed the short-term cash.
"I took it and ran. I had to do what I had to do," he said, adding: "I'll figure this out and try to get back to work. It's no fun living with your parents and not having any money to go out with your friends, let alone having no money to pay your bills."
Have a tip on business or investigative stories? Reach the reporter at craig.harris@usatoday.com or 602-509-3613 or on Twitter @CraigHarrisUSAT or linkedin.com/in/craig-harris-70024030/
Amritpal Kaur Sandhu-Longoria is the consumer watchdog on USA TODAY’s investigations team. Send her your tips at asandhulongoria@usatoday.com, on Twitter @AmritpalKSL or on Signal at (434) 473-4073.
This article originally appeared on USA TODAY: 'Rent-a-bank' replacing payday loans with triple-digit interest rates
