Graeme Sloan/Sipa USA via Reuters
In 2019, Sarah Ahmed needed about $2,000. She had just moved from Iowa to Tampa, Florida. And she was renting a new apartment and enrolling her young son in an afterschool program.
“So I was just sort of running a little close to red,” Ahmed says, “between moving, finishing furnishing my house, and getting it ready for my son.”
Ahmed says she tried to get a loan from a regular bank, but with her student loan debt, she couldn’t qualify. So she started looking online. She found a lender called Personify Financial willing to give her a two-year loan of $2,300. She says she sent her pay stubs and financial information. Then the company told him what the annual interest rate would be.
“It was like 98%,” she says.
Ahmed says she was nervous about accepting such a high rate. But she felt a little desperate.
As a general rule, such high interest rates are illegal in most states, including Florida, where Ahmed lives.
“Florida limits interest rates to about 31% on a $2,000 loan,” says Lauren Saunders, an attorney at the National Consumer Law Center.
Saunders says, however, that some online lenders have found a way to evade those state laws. And they charge people like Ahmed 100% or even 200% interest.
“We call it a bank rental program,” Saunders says.
It’s called because online lenders like Personify Financial are not banks. And normally they would be bound by interest rate caps. But Saunders says companies get around those caps by partnering with smaller banks that most people have never heard of.
“Banks are exempt from most state interest rate laws,” Saunders said. “So predatory lenders have found they can find a rogue bank, launder their loan through the bank, call it a ‘bank loan,’ and pretend it’s not subject to the credit limit. government interest rate.
The vast majority of banks do not rip people off with exorbitant interest rates on loans. But Saunders’ nonprofit identified a handful who participate in these bank leasing programs with more than a dozen online lenders. His rough estimate is that together they have loaned over $1 billion in recent years.
Saunders’ organization and more than a dozen consumer protection groups appeal government to step in and ban these bank leasing schemes. She is hopeful because regime change is underway at the Federal Deposit Insurance Corp., an agency she says “has the power to end risky practices that impact the safety and soundness of the Bank”.
On Friday, Jelena McWilliams, a Trump appointee, resigned as Chairman of the FDIC. His successor will be appointed by President Biden. “With the change in leadership at the FDIC,” Saunders said, “it’s time for the FDIC to stop its banks from being a front for predatory lenders.”
In Ahmed’s case, her loan, with its 97.1% interest rate, was not from Personify Financial, the lender she found online. It was issued by a Utah-based bank called First Electronic Bank.
“Very little went towards the main balance,” says Ahmed. “Most of it was for interest. … I was working hard, and it felt like I wasn’t making any progress.”
A year after borrowing $2,300, her loan documents show she had paid $1,930 only in interest and still owed $1,548 on principal.
Saunders says First Electronic Bank has only one physical bank branch, but makes these high-interest loans available across much of the United States through this bank leasing program.
“He does normal things outside of the branch, but he also has this side business of laundering loans for predatory lenders,” Saunders said.
First Electronic Bank declined an interview. He said in a statement that he is complying with the law and giving people access to loans “whether they have good credit or are shut out of the banking system due to a lack of credit. ‘credit history or previous credit problems’.
Personify Financial also declined an interview, but said in a statement it helps smaller banks extend more credit to borrowers.
For his part, Ahmed feared he would have to keep paying thousands of dollars more in interest on that loan.
“It felt like I had asked for help to get out of this hole and just created a deeper hole that I would inhabit,” she says. “I felt stuck.”
But in the end, she fell apart. Ahmed repaid the loan with the help of a non-profit organization called Capital Good Fund which gave him an affordable loan with a much lower interest rate. So now she can spend more of her salary on her son. She recently signed him up for football and bought him cleats and a uniform.