US Payday Lenders Avoid Interest Caps Through Rent-A-Bank Scheme
04 Dec 2019
Approx Reading time: 3 minutes
- Payday loans lenders are facing increasing regulatory scrutiny but have found ways to circumvent regulations
- Florida online payday loans interest capped between 18% and 30% for installment loans
- OppLoans and Elevate charging borrowers interest rates of between 99% to 160%
Payday loans lenders have been under increased scrutiny for selling consumers expensive loans that they are unable to repay. Recently some legislators introduced legislation that will see a cap on payday loans interest rates.
Payday loans lenders continue to exploit borrowers
The payday loans can sometimes cover emergencies or help in paying bills, but they are nonetheless exploitative. Regardless of the size of the loan, the high-interest rates and recurring fees can leave consumers grappling in debt.
Because of the exploitative nature of payday loans, several states, including Florida, have come up with measures to regulate lenders. The states have imposed interest rate limits for short-term loans as well as installment loans offered by these lenders. However, some greedy lenders have found a way to circumvent these consumer protections. Unfortunately, Florida lawmakers have remained quiet as the lenders exploit consumers.
Elevate and OppLoans circumventing interest caps
Through the convenience of online applications, OppLoans and Elevate Financial are charging consumers three-digit interest rates. In Florida, all online payday lenders cannot charge interest rates exceeding between 18% and 30% on installment loans.
However, OppLoans and Elevate have found a way around the limits. According to the National Consumer Law Centre, the lenders are charging between 99% and 160% in annual interest. This is after factoring in other fees.
Consumer advocates have raised concern regarding the actions of these lenders. Although small-dollar loans such as those offered by Amscot have risks, they nonetheless don't plunge borrowers into debt. The loans do not exceed $1000, and borrowers have to pay them back at once. However, what is causing alarm is the long-term and big-dollar loans that trap consumers in a borrowing cycle. As a result, online payday loan lenders report high default rates from borrowers.
Payday loans lender using rent-a-bank scheme to exploit borrowers
Elevate, and OppLoans found a way of fleecing consumers through renting out of chartered banks. In this "rent-a-bank" scheme, a lender will approve a loan and then send consumer information to the bank. Since the banks are regulated under federal law, they are thus exempt from interest limits. The bank will issue the funds, but it will sell the consumer's debt to a payday lender at a small premium.
As a result of this scheme, lenders such as OppLoans and Elevate have managed to circumvent state regulation. It is a win-win situation for the lender and the bank as the bank also manages to make a quick profit. This is to the disadvantage of the borrower who will end up paying expensive rates for the debt.
A spokesperson of Elevate defended the model, indicating that it is within state and federal laws. The spokesperson indicated that they are proud of what their banking partners are offering borrowers in Florida.