Stopping predatory rent-a-bank loans is good policy

To the editor,

A recent BankThink op-ed ("Colorado is mapping a dangerous path on access to credit," January 2, 2024) argues that Colorado and other U.S. states should allow, even facilitate, loan products that violate their own laws and harm their residents. This is bad advice.

Some state-chartered banks partner with nonbank lenders that make loans at interest rates above what state law permits. This is a "rent-a-bank" scheme. 

These loans often load consumers with debt, lead to repeat reborrowing or bleed borrowers dry until they default. Consider OppFi, Enova and Elevate — large, publicly-traded nonbank lenders that use this scheme to issue loans at or above 100% APR. These companies' public filings with the SEC show annual loss rates on their loans in 2019 averaged 50%; they show loss rates in 2022 averaged 55%. For comparison, Federal Reserve Board data show bank credit cards' average annual loss rate in 2019 was 4% and in 2022 was 2%.

Furthermore, the Center for Responsible Lending calculated that a person with a typical OppFi loan of $1,500 will pay over $1,000 more than they would with a loan that complies with usury laws. 

Rent-a-bank schemes are facilitated by the 1980 Depository Institution Deregulation and Monetary Control Act, or DIDMCA. By opting out of DIDMCA, as Colorado has done, state policymakers can reassert their ability to enforce their own laws and ensure that lenders headquartered in their state don't face unfair competition from out-of-state lenders with no regard for state sovereignty.   

Policymakers and regulators should follow Colorado's lead by protecting consumers from predatory rent-a-bank loans and defending the laws already put in place. Banks and investors would be wise to avoid reputational risks that accompany participation in these schemes.