CFPB official voices concern over high-cost consumer loan partnerships

The Consumer Financial Protection Bureau is scrutinizing high-cost loan partnerships between banks and some online consumer lenders, an agency official said Wednesday, calling the arrangements “rent-a-bank schemes.”

The comments indicate Biden administration regulators could take action to limit the partnerships, which offer credit to consumers who typically struggle to get traditional loans. Borrowers sometimes end up paying triple-digit interest rates.

An official at the Consumer Financial Protection Bureau indicated in remarks Wednesday that the agency is sympathetic to consumer advocates’ criticism of partnerships that enable nonbanks to offer high-cost consumer loans.


Consumer advocates have long sought a regulatory crackdown on the partnerships, saying that digital lenders are essentially using bank charters to make loans at interest rates they would not be able to charge on their own because of state interest-rate caps.
The comments by CFPB Deputy Director Zixta Martinez, who spoke to a group of consumer advocates at a conference, suggested the agency is taking a similar view.

“I want to assure you the CFPB hears you, we share your concerns and we are taking a closer look at this issue,” Martinez said at a Consumer Federation of America conference in Washington, D.C.

Much of the focus of potential regulatory action on the partnerships has revolved around the Federal Deposit Insurance Corp., which oversees a handful of community banks that partner with the digital lenders. But the comments Wednesday indicate the CFPB is weighing its own steps on the issue.

“Any scrutiny of these outrageous rent-a-bank schemes is welcome,” Lauren Saunders, who tracks the partnerships as associate director of the National Consumer Law Center, said in an interview. The loans’ high interest rates “exploit vulnerable people and put them in a debt trap,” she added.

Companies that make the loans have disputed the criticisms, saying they are true partnerships between community banks and digital lenders. From a legal perspective, the partnership element is critical because banks have the ability to preempt states’ interest rate caps, while nonbanks are subject to rate limits.

The Online Lenders Alliance, whose members include high-cost lenders like Elevate, Enova, Axcess Financial and CURO Financial Technologies, has said the partnerships help broaden access to credit for consumers who are often shut out by traditional lenders.

The digital lenders help banks by providing expertise and analytics in reaching new consumers, and the loans get scrutiny from federal bank regulators, the group wrote earlier this year in a letter to the FDIC’s board. The board consists of FDIC Acting Chairman Martin Gruenberg, CFPB Director Rohit Chopra and Acting Comptroller of the Currency Michael Hsu.

“This ensures borrowers are protected, supervision is appropriate, and consumers are able to work with a federally supervised lender, giving them greater confidence and security,” wrote Andrew Duke, executive director of the Online Lenders Alliance and a former CFPB official during the Trump administration.

Martinez, the CFPB’s deputy director, said that some lenders “attempt to use these relationships to evade state interest rate caps.” The comments indicated the agency is sympathetic to consumer advocates’ view that the fintech companies are the “true lender” and therefore should be subject to state rate caps.

She also said that some lenders have “unusually high default rates,” raising questions about whether the companies are setting “borrowers up for failure.” The CFPB’s consumer complaint database also includes “significant consumer protection concerns” with some loans made through bank partnerships, Martinez added.

Fifteen consumer groups wrote to the FDIC in February calling for a crackdown, saying the agency “appears to have done nothing to curtail the predatory lending that has exploded on its watch.” A few California lawmakers made a similar request last month, saying that FDIC-supervised banks are helping nonbanks evade the state’s 36% rate cap on certain consumer loans.

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