Rent-A-Bank Payday Lending: How Banks Help Payday Lenders Evade State Consumer Protections

11/13/2001

Executive Summary

Since the early 1990s, a series of reports by the Consumer Federation of America (CFA) and the state PIRGs have documented the effects of financial deregulation on American consumers. One consequence of deregulation of interest rates, high credit card interest rates and high bank fees has been the rapid growth of the alternative financial services (or fringe banking) industry, which includes check cashing outlets, payday loan companies, rent-to-own stores, high cost second mortgage companies, sub-prime auto lenders, traditional pawn shops and the growing business of auto title pawn companies. This report examines payday lending in detail. It updates an April 2000 CFA/PIRG report, Show Me The Money.1

The report provides a detailed and up-to-date summary of the legal and legislative status of the payday lending industry around the country. It places particular emphasis on analyzing the most important and controversial trend in payday lending: the growing use of banks to evade state usury laws, small loan rate caps, and, even, state payday loan laws. Thwarted by state legislatures and regulators, payday lenders are forming partnerships with a handful of federally insured depository institutions in an effort to evade state laws by taking advantage of banks’ rights to do so. Positively, the report finds that federal bank regulators and state attorney generals are opposing this disturbing “rent-a-bank” trend.

The report also includes detailed store-by-store and state-by-state results of a 2001 survey of 235 payday lenders in 20 states and the District of Columbia. It compares these findings to those of a 1999-2000 survey reported in Show Me The Money. Finally, the report makes detailed recommendations to state and federal policymakers, provides advice to consumers, and urges banks and credit unions to do a better job in serving the segment of the population targeted by the payday lenders—low to moderate income, working class and single-parent (especially female) consumer households.