The CFPB is gunning for rent-a-banks

A new contender enters the rent-a-bank fray

Consumer groups pushing for banking regulators to crack down on so-called rent-a-bank lending for personal loans may have found a willing watchdog. Zixta Martinez, deputy director of the Consumer Financial Protection Bureau, said at a recent consumer group conference that the agency is taking a “close look” at the lending partnerships between banks and nonbanks, which are often fintech companies.

“Some lenders employing rent-a-bank schemes have unusually high default rates, which raise questions about whether their products set borrowers up for failure,” Martinez said at the June 15 Consumer Federation of America’s assembly. “And our complaints database reveals a range of other significant consumer protection concerns with certain loans associated with bank partnerships.”

Rent-a-bank partnerships are getting a closer look. Mind you, industry proponents would rather you say “marketplace lending arrangements.”

• Whatever you call them, consumer advocacy groups say lenders are wrongly dodging state interest rate caps and offering loans with annual interest rates sometimes exceeding 100%.
• “Most states have interest rate limits that apply to certain types of loans, but they generally don’t apply to banks” because of exemptions for institutions under federal supervision, said Lauren Saunders, associate director at the National Consumer Law Center. “So a few predatory lenders are trying to evade state interest rate limits by laundering their loans through a bank.” The NCLC believes the nonbank should be considered the lender and held to the rate caps in the state it is lending, regardless of where the partner bank is located.
• The NCLC has identified nine companies partnered with six federally-supervised banks to distribute loans at rates that exceed 100% in states outlawing such interest. All but seven U.S. states have laws capping interest rates on personal installment loans, typically at no more than 40%, according to NCLC.

This controversy might sound familiar. That’s because Congress last year took action against this type of lending relationship, voting in June 2021 to overturn the Office of the Comptroller of the Currency’s True Lender rule.

• That provision, passed in the final months of the Trump administration, said that any bank that signs a loan document should be considered its true lender for regulatory purposes, even if the loan is serviced by or sold to a high-interest lender.
• Its repeal did not outright ban such arrangements, but consumer groups say it led to the OCC taking a stricter stance on the partnerships.

The CFPB could bring fresh eyes to the space. Part of CFPB’s mandate is to investigate unfair, deceptive or abusive acts or practices. The agency in March updated its internal guidance for examining practices for unfairness.

• “They may look at things like: How much revenue is being generated off this?” said Stefanie Jackman, a partner at Troutman Pepper. “How is that shared between the bank and the nonbank? What other things are the nonbanks doing?”
• The CFPB has taken a more aggressive stance toward banking and the fintech industry under director Rohit Chopra, who was confirmed to the role in October.

“What is clear is that regulators are interested in this model,” Jackman said. “This is an important time for the industry to help regulators understand what types of financial products this facilitates and how those are needed.” The CFPB’s scrutiny could bring fresh regulatory firepower to an arrangement that has allowed some fintech lenders to grow and, as the industry sees it, serve customers overlooked by traditional creditors. Consumer advocates counter that such access comes with onerous terms.

— Ryan Deffenbaugh (email | twitter)

A version of this story first appeared on Protocol.com. Read it here.

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