When banks and fintechs team up for the purpose of offering affordable, transparent and fair products, consumers and small businesses benefit. But when companies calling themselves fintechs use banks to enable unaffordable, usurious lending that non-bank lenders could not do legally directly, the results can be disastrous.
It is these fraudulent bank partnerships that benefit most from a rule issued late last year by Office of the Comptroller of the Currency (OCC). Congress has the opportunity to overturn that rule using the Congressional Review Act. It should do so.
Many states limit the interest rates on consumer loans, and some have civil or criminal usury caps that also apply to business loans. Nonbank lenders must comply with these laws, but nearly every state has exempted banks from their rate caps, and federal laws allow banks to “export” this lack of a rate cap to other states, preempting those states’ usury laws. Unfortunately, predatory lenders have found a small number of rogue banks that are willing to lend their name to enable truly shocking loan programs run by nonbank entities.
The OCC’s rule prohibits courts from looking at the truth about who the lender is, preempting state usury caps as long as a bank is “named as the lender on the loan agreement.” It does not matter under the rule if the nonbank lender funds the loan and controls virtually every aspect of the loan program save a rubber stamp approval from the bank. Courts can’t look beyond the fine print.
Here’s how these relationships typically work: A lender helps identify borrowers to whom it wants to lend at rates above what their states permit. It makes a deal with a bank in another state, where such rates are allowed, to put up the money. Then the bank sells the lion’s share of the loan to the lender or a company connected to the lender, according to an investigation by the Wall Street Journal.
For example, the OCC’s rule is being actively used right now to preempt state usury laws and to defend one lender’s right to charge 268% APR on a $67,000 loan to a restaurant owner. Markisha and Carlos Swepson needed income after a long renovation process and a new baby. According to court documents, World Business Lenders offered a daily rate of .3575%, and the Swepsons did not understand how that translated into a shocking APR. The Swepsons dealt entirely with WBL, which collected the loan payments, but Axos Bank was listed as the lender. After the Swepsons fell behind, WBL refused to work with them and turned back to Axos to file a foreclosure action against the property that secured the loan. Axos Bank is now arguing that the court cannot look at whether WBL was just renting the Axos Bank charter: “as recently made clear by the Office of the Comptroller of the Currency, even such arrangements are proper,” and even if the loan were immediately assigned to WBL, “the OCC’s final rule would permit the same interest rates and fees to be charged by WBL as by Axos Bank.”
These rent-a-bank loans are not just destroying small businesses – they even imperil the owners’ homes. A shocking 30% of WBL’s real-estate loans result in default. One in ten results in a formal foreclosure, and in many other cases, the small business owner is forced to sell their home.
The owner of a Georgia engineering services firm was threatened with foreclosure over a $55,000 loan at 88% APR. WBL prepared all of the documents Axos Bank (then known as BOFI Federal Bank) listed as the lender, and then an officer of WBL used a power of attorney for the bank to assign the loans to WBL. WBL sought $133,519 in interest and threatened to foreclose on the owner’s home.
Lenders are using these “rent-a-bank schemes” as a loophole more and more, originating the high-cost loans through a FDIC-regulated bank before buying them back in order to continue to charge exorbitant interest rates, according to CNBC, who reported on another example of this scheme with the fintech Elevate.
The “certainty” in the bright line test in the OCC’s rule comes at the cost of protecting evasive rent-a-bank schemes set up solely for the purpose of enabling destructive, usurious loans. Legitimate bank partnerships have a lot more bank involvement than a name on a piece of paper, and they do not need such a crude form of certainty. Indeed, the crude rule undermines incentives for banks to be actively involved in bank partnership programs.
Congress must act now to repeal the fake lender rule. As small businesses emerge from the devastating COVID crisis, they need a true helping hand, not predatory lending.