Federal rule change could mean disruption to South Dakota payday loan cap

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SIOUX FALLS, S.D. (KELO) — It has been more than three years since South Dakota voters overwhelmingly passed an interest rate cap of 36% on loans. This killed much of the payday loan market in the state, and drove businesses like Chuck Brennan’s Dollar Loan Center out of the Mount Rushmore State.

However, fast cash is still a growing industry and thanks to a proposed federal rule, it could be here to stay.

KELOLAND News discovered you can still get approved for a loan with an interest rate 124% higher than the voter-approved cap.

Now, a proposed federal rule could solidify that loophole. The Federal Deposit Insurance Corporation, an independent government agency, is looking to change the way banks handle loans.

The rule, according to a collection of 24 state attorneys general (not South Dakota), would allow banks to repackage loans as innovation and thus bring back the payday loan industry.

“At stake are so-called “rent-a-bank” schemes, in which banks heavily regulated by federal agencies like the FDIC enter into relationships with largely unregulated non-bank entities for the principal purpose of allowing non-banks to evade state usury laws,” the AGs said in a letter sent earlier this month.

The letter from attorneys general, including Iowa and Minnesota, argues it could overturn the will of the voters in states like South Dakota.

“At a time when Americans of all political backgrounds are demanding that loans with triple-digit interest rates be subject to more, not less, regulation, it is disappointing that the FDIC instead seeks to expand the availability of exploitative loans that trap borrowers in a neverending cycle of debt,” they wrote.

The FDIC rule comes after a 2015 federal could decision that put into question the enforceability of a federal law, which allowed national banks to charge interest rates in the state they are based in, not the state laws where the loan is being taken out. The court decision said when the loan was issued by the bank, but then given to the person by a non-bank, that law wouldn’t apply.

“The FDIC views unfavorably the arrangements in which an entity partners with a State bank for the sole purpose of evading a lower interest rate established under the law of the entity’s licensing state(s),” FDIC Chairman Jelena McWilliams said in a statement.

The Center for Responsible Lending, along with 11 other groups, says the FDIC does endorse those views. An example of this, they say, can be found in Colorado where the FDIC signed off on a predatory plan in the courts.

The state has a 36% cap, similar to South Dakota’s.

How “rent-a-bank” works

CRL said World Business Lenders can charge 120% APR on a $550,000 loan. That’s because the loan came from Wisconsin-based Bank of Lake Mills. They sold the loan back to World Business Lenders.

This is where the “rent-a-bank” schemes come into play.

The Center for Responsible Lending, in a 110-page comment to the FDIC, said the rule would have an impact on South Dakota’s interest rate caps and the lenders who left the state.

“The FDIC’s proposal would embolden their return,” CRL said in its letter. “The FDIC fails to consider the proposal’s impact on millions of consumers… residing not only in South Dakota, but in all states with interest rate caps aimed at high-cost lending, and in all states who might like to enact those caps in the future.”

CRL shares more than 100 stories of people who were directly impacted by predatory loans, including two stories shared in KELOLAND.

At the time of our 2015 Eye on KELOLAND, in Sioux Falls, there were more than 50 payday, title, or signature loan shops.

Homeless veteran Mel Hair got a car title loan of $200. One title loan turned into three and went up to more than $2,000. He ended up making monthly payments of $430.

A similar story was from Kim Brust. The Sioux Falls woman fell into a cycle of debt, taking out eight loans from four lenders in Sioux Falls.

“I fell into that same trap and I know better, I’m not stupid, but I was stressing about money. I was wondering sometimes where the next meal was coming from,” Brust said.

Interest rates for her were from 247 to 608%.

“Interest rate limits are the simplest and most effective protection against predatory lending,” CRL said in its letter. “Since the time of the American Revolution, states have set interest rate caps to protect their residents from predatory lending.”

Lenders are pushing for the rule change, like Affirm. The “new way to pay” is offered by Walmart.com, Peloton and American Airlines.

“The goal of this partnership is to offer consumers a quick, simple, and transparent alternative to credit cards,” Affirm said in its comments to the FDIC. “The consumer receives an instant credit decision during the checkout process. At that time, the consumer sees exactly what they will pay over the full loan term, including the total amount of interest, if they decide to take a loan.”

The company said the average loan is $800 and usually last 3, 6 or 12 months. They say APRs are between 0-30%, disclosed up-front and contain no additional fees.

“This proposal will help foster responsible innovation in the banking system by providing clarity and stability to bank partnerships with financial technology companies and the loan market in general,” the company said.

Affirm uses an FDIC-insured bank, Cross River Bank, to lend the money. The New Jersey-based bank first lends the money to Affirm. In this case, Affirm pays the retailer for the product purchased, and the customer pays Affirm back.

That’s one-way “Rent-A-Bank” works.

Fast cash in South Dakota

Another is in a “fast cash” situation, similar to a payday loan.

Opploans is one of those platforms. On a traditional payday loan, a customer would get the money but have to pay back the loan by payday. Opploans uses an installment process, meaning a longer repayment period. That doesn’t mean interest rates are within the legal limit of 36 percent.

The company bills itself as “the money you need, when you need it” and touts an A+ rating from the Better Business Bureau, which is accurate.

According to its website, Opploans offers loans ranging from $500 to $4,000. The repayment terms are between 9 and 18 months and an APR of 160%. That means on a loan of $4,000 with a repayment term of 18 months, a customer would end up paying at least $10,700. Under the law, it should have only been just over $5,200.

Opploans is licensed in South Dakota.

So, why can Opploans ignore the law? They also use a “Rent-A-Bank” model. The loans are underwritten, approved and funded by FinWise Bank. This FDIC-insured Utah bank then sells the loan to Opploans, who services the loan to the customer.

Because it goes through that bank, the law doesn’t apply, according to the South Dakota Department of Labor and Regulation’s IM22 webpage.

“The initiated measure does not apply to state and national banks, bank holding companies, other federally insured financial institutions, and state chartered trust companies,” the site said.

KELOLAND News tried to analyze several other lenders similar to Opploans, but was unable to get detailed information. Opploans did put information about each state, loan terms, and the APR clearly on its site.

A majority of the comments submitted for this rule-change were against it. The North Dakota Economic Security and Prosperity Alliance pointed out Opploans as a way to evade the state’s rate caps.

“Rent-a-bank schemes harm North Dakotans by subjecting them to predatory loans that exploit many of our most financially vulnerable residents,” the organization said.

Consumer Reports, the product review website, is also against the policy change.

“The rent-a-bank model is not a new idea; in fact, it was used by payday lenders in prior decades to engage in risky lending activities. The FDIC previously concluded that the model was unsafe and urged member banks to reconsider such partnerships. We urge the FDIC to remember the lessons of the past, respect states’ longstanding role in regulating interest rates on consumer loans, and rescind this proposal,” Consumer Reports wrote in a letter to the FDIC.

A similar rule also went through the U.S. Department of Treasury’s Office of the Comptroller of the Currency. The comment period for this rule also has ended, and saw a similar reaction to the FDIC rule.

AARP, on behalf of its 38 million members, called out South Dakota specifically when opposing the rule.

“If the proposed rule officially sanctions these types of partnerships and extends banks’ interest rate authority to nonbanks, it will additionally subvert the will of voters in states where rate caps limiting high-cost lending resulted from broadly supported ballot initiatives,” AARP said.

Several members of Congress, local governments and faith-based organizations all wrote letters in opposition.

The FDIC argues the rule change would promote safety to banks during an economic crisis.

“The proposal would promote safety and soundness by upholding longstanding principles regarding the ability of banks to sell loans,” the agency said.

What’s next

It’s not clear when the rule would go into effect. The FDIC comment period closed earlier this month.

In Congress, a bipartisan group of lawmakers is working on the Veterans and Consumers Fair Credit Act. It would take a 36% rate cap, already in effect small-dollar payday and car title projections, to all consumers.

A bill has been introduced in both the House and the Senate, but has not moved very far.