They’re here. The poltergeists of consumer lending: predatory “rent-a-bank” lenders.
While we have seen tremendous progress in protecting consumers since Illinois adopted a 36% interest rate cap in 2021, we now face this next challenge. These predatory lenders are operating here with high-cost loans that far exceed Illinois’s rate cap. Illinois is among the majority of states in the U.S. whose consumers are vulnerable to these high-cost loans.
I learned about this from Vera, a mother of two young boys, who received a loan online with an annual percentage rate of 159.51% from a notorious rent-a-bank lender based in Chicago partnered with a bank in Utah.
But how is this possible? Currently, federal law permits an out-of-state bank to make loans under the laws of its home state. Predatory lenders are able to “rent” or partner with an out-of-state bank to offer loans at rates far above Illinois law.
But as rent-a-bank lenders spread, another product has taken center stage as the Babadook of consumer finance: earned wage access (EWA) products. Generally speaking, these products enable workers to receive money they have already earned but not yet been paid. Advance amounts are typically no more than $100. EWA providers are paid through voluntary “tips” ranging from $1-$12 and through fees for immediate deposit, which are around $4 to $5. If a consumer doesn’t tip and doesn’t request immediate deposit, the advance is free. A recent study by the Financial Health Network found that, in the average transaction, a consumer pays about $4.
Critics argue that EWAs can trigger an overdraft situation when the repayment is automatically deducted from the consumer’s bank account, but this is true of any payment obligation that is met through an automatic deduction: rent or mortgage payments, student loan payments, credit card payments and more. Remarkably — and unique to EWA as far as I know — some EWA providers reimburse overdraft fees if they have been triggered as a result of the automatic deduction.
As with all industries, some EWA companies are not angels. Their apps make it tricky not to tip and make expedited payment the default setting. These problems are not inherent to the product itself. Consumer groups can try to address this issue by educating consumers about EWA, empowering them to make informed choices about tipping and selecting an EWA provider. At the Woodstock Institute, we have also urged EWA providers to modify interfaces of their apps to make them more consumer friendly.
As a result of my personal experience as an EWA customer, and unlike a large portion of my fellow consumer advocates, I believe demonizing EWA is not justified and is stalling progress that we might be able to achieve in curbing such problems as the predatory rent-a-bank loans that are being made by a company that I can see from my office window.
Not only are predatory rent-a-bank loans more harmful to consumers, there are proven strategies for advocates to address the clear-and-present dangers of these lenders including:
- Support states in passing legislation opting out of the decades-old federal law that permits out-of-state banks to import interest rates from other states
- Continue to press federal banking regulators to declare predatory rent-a-bank lending anathema to banks’ duties under the Community Reinvestment Act
- Pursue a comprehensive litigation strategy in states, such as Illinois, where laws are intended to make it more difficult for lenders to hide behind out-of-state banks
- Continue to push for a nationwide 36% interest rate cap, which would put an end to rent-a-bank shenanigans. Here in Illinois, our 36% rate cap is supported by 86% of Illinoisans. And the law establishing the rate cap, the Predatory Loan Prevention Act , passed our legislature with large bipartisan majorities in both chambers.
The medium in Poltergeist told Carol Anne to “go toward the light,” and I am hoping in the not-so-distant future that the advocacy community can re-unite around a common foe — the specter of old-fashioned, triple-digit interest rate loans, which continue to haunt the consumer finance marketplace.
Brent E. Adams is the senior vice president of policy & advocacy at Woodstock Institute (2016-present) — a nonprofit focused on consumer financial protection. Adams is also the former secretary of Financial & Professional Regulation for the state of Illinois (2009-2012).