Regulators Should Block Costly Fintech Loans, Advocates Say

(Bloomberg) -- U.S. regulators should crack down on banks that partner with fintechs to charge interest rates that would be illegal in the lenders' home states, a coalition of advocacy groups said.

The Federal Deposit Insurance Corp. and other U.S. agencies need to stop banks they oversee from “engaging in high-cost predatory lending” through their work with financial-technology firms, the National Community Reinvestment Coalition, Consumer Reports, the NAACP, the Center for Responsible Lending and other groups said in a letter Friday.

“Rent-a-bank schemes have flourished at FDIC banks in the past few years and it is time for that to come to an end,” the coalition said in the letter to the heads of the FDIC, the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency. “The FDIC has the tools that it needs to prevent its banks from fronting for predatory lenders that are evading state law and making grossly high-cost installment loans and lines of credit” with annual percentage rates as high as 225%.

The letter follows Congress's move last year to overturn the OCC's Trump-era “true lender” rule that made it easier for banks to partner with fintechs without running afoul of state interest-rate limits. In signing the bill, President Joe Biden said the change would “protect borrowers against predatory lenders” who have found workarounds for interest-rate caps and trapped borrowers in “a cycle of debt.”

The FDIC, meanwhile, hasn't proposed similar changes and “appears to have done nothing to curtail the predatory lending that has exploded on its watch,” the coalition of advocacy groups said in its letter.

“The FDIC has permitted its banks to use their charters to enable these practices,” Adam Rust, senior policy adviser at the National Community Reinvestment Coalition, said in a statement. “Now that the board of the FDIC is under new leadership, it is the time to close this loophole.”

FDIC Chairman Jelena McWilliams, appointed by former President Donald Trump, is leaving the regulator. Board member Martin Gruenberg, a Democrat, will be acting chair.

Pets, Furniture

Forty-two U.S. states and the District of Columbia “have at least one predatory lender using a rent-a-bank partnership,” the coalition said in its statement. Such loans are offered through check-cashing stores, online and even at pet stores, auto-repair shops and furniture retailers, the group said.

The coalition said it's identified six companies working with high-cost, non-bank lenders offering loans that would be illegal for the banks to make directly: Republic Bank & Trust, chartered in Kentucky; Lead Bank, chartered in Missouri; and FinWise Bank, Capital Community Bank, First Electronic Bank and Transportation Alliance Bank, all chartered in Utah.

Capital Community Bank is “entirely focused on fair lending practices and providing financial products to customers at various stages of the financial journey,” Chief Executive Officer Mike Watson said in a statement. “We want to provide viable financial solutions to customers who often need a lifeline from a bank and an opportunity to reestablish and rebuild their credit, and our relationship with our servicers provides products to these customers that are fair, viable and regulated.”

First Electronic Bank said it too complies with regulations.

“For all loans we issue, we ensure compliance with the law, provide transparent rates and pay close attention to the activities of our service providers and any complaints we receive regarding our business activities or the loan products we offer,” First Electronic Bank said in an emailed statement. “Leveraging service providers helps us expand our reach to a broader community with more innovative products than we could otherwise provide.”

Representatives for the other banks didn't immediately respond to phone calls and emails seeking comment.