Rent-a-bank schemes would undercut Maine’s borrower protections

Maine has a long tradition of consumer protection, drawing on a shared commitment to transparency and fairness for borrowers. Lawmakers recently extended Maine’s track record by shoring up protections from short-term lenders that charge exorbitant rates to small-dollar borrowers. As people struggle with the high cost of housing, energy and other essentials, these standards serve as an important protection for people who are most financially vulnerable.

Protection in place for Maine borrowers

State law has long capped interest rates on short-term loans of under $2,000 at 30 percent, often marketed as “payday loans”. But in recent years, some lenders have circumvented these caps through a loophole created by a mismatch between state and federal policy.

Nationally chartered banks covered by the Federal Deposit Insurance Corporation (FDIC) are largely exempt from state interest rate caps. Lending firms capitalize on this by engaging in what has become known as “rent-a-bank” schemes, in which a bank chartered in another state with more relaxed interest rate laws makes a loan on behalf of a financial technology (“FinTech”) firm or other small-dollar lender, to which the loan is usually then reassigned. The impact of this loophole was that lenders could offer unsustainable loan conditions to vulnerable borrowers, undermining Maine’ usury laws.

A bipartisan group of lawmakers passed a law which shut the door on this practice in 2021. As a result, Mainers continue to benefit from some of the strongest protections on the books.

Impacts of predatory lending

While short-term lenders may characterize their services as a lifeline to borrowers in an occasional, unforeseeable jam, unscrupulous payday lenders prey on families who are struggling with their bills and use loan servicing tactics to trap them in an impossible cycle of debt.

Research shows most short-term borrowers are using the money to pay for ordinary living expenses and the average borrower has a payday loan out for several months of the year. The Consumer Financial Protection Bureau has found the overwhelming majority of payday loans are rolled over or renewed and three-quarters of all loan fees came from borrowers with more than 10 transactions over a 12-month period. This is due to lenders’ practices of automatically rolling over loans, making automatic withdrawals even when the borrower has insufficient funds, and charging exorbitant overdraft fees.

Unlike for banks and credit card companies, federal and state laws do not require payday lenders to determine that a loan applicant has the financial resources to repay their loan. Unscrupulous lenders market their loans to older individuals and people with disabilities who receive federal benefits; veterans who live on the edge of poverty and deployed military personnel who are away from home and busy with their service duties; women, especially single mothers who often cannot meet living expenses; and Black, Brown, Indigenous and people of color who have lower incomes because of wage discrimination.

In a lawsuit filed last year, California’s Department of Financial Protection and Innovation alleges that a FinTech lender, Opportunity Financial, engaged in a rent-a-bank scheme that resulted in illegally charging 38,000 consumers an average interest rate of 153 percent, far above the state’s 36 percent interest rate cap. The firm, often referred to as OppFi, has argued the Utah-chartered loan originator, FinWise Bank, is the lender, and the loans are therefore exempt from the interest rate cap. According to a recent quarterly report filed with the Securities and Exchange Commission, FinWise describes its third-party loan origination program as the primary source of the bank’s significant growth and profitability.

Maine law currently makes clear that lenders may not make or arrange for loans with interest rates that exceed our state caps, as pursued through rent-a-bank schemes. This statute protects Maine residents from predatory lenders and prevents usury laws from being undercut.