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 getting her young son set up in an after-school program.
"So I was just kind of running a little close to the red," Ahmed says, "between moving, finishing furnishing my place and getting it ready for my son."
Ahmed says she tried getting a loan from a regular bank, but with her student loan debt, she couldn't qualify. So she started looking around online. She found a lender called Personify Financial willing to give her a two-year, $2,300 loan. She says she sent in her pay stubs and financial information. Then the company told her what the annual interest rate would be.
"It was like 98 percent," she says.
Ahmed says she was nervous about accepting such a high rate. But she was feeling kind of desperate.
Typically, interest rates that high are illegal in most states, including Florida, where Ahmed lives.
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"Florida limits interest rates to about 31 percent on a $2,000 loan," says Lauren Saunders, an attorney with the National Consumer Law Center.
Saunders says, though, that some online lenders have figured out a way to evade those state laws. And they're charging people like Ahmed 100 percent or even 200 percent interest.
"We call this a rent-a-bank scheme," says Saunders.
It's called that because online lenders like Personify Financial are not banks. And normally, they'd be bound by state interest rate caps. But Saunders says the companies get around those caps by partnering with small banks most people have never heard of.
"Banks are exempt from most state interest rate laws," Saunders says. "So predatory lenders have found that they can find a rogue bank, launder their loan through the bank, call it a 'bank loan' and claim that it's not subject to the state interest rate limit."
The vast majority of banks do not gouge people with sky-high interest rates on loans. But Saunders' nonprofit has identified a handful that are in these rent-a-bank schemes with more than a dozen online lenders. Her rough estimate is together they've loaned more than $1 billion in recent years.
Saunders' organization and more than a dozen consumer protection groups are calling on the government to step in and ban these rent-a-bank schemes. She's hopeful because a change of regime is underway at the Federal Deposit Insurance Corp., an agency that she says, among other things, "has the authority to stop risky practices that impact the safety and soundness of the bank."
On Friday, Jelena McWilliams, a Trump appointee, stepped down as chairman of the FDIC. Her successor will be nominated by President Joe Biden. "With the change of leadership at the FDIC," Saunders says, "it's time for the FDIC to stop its banks from fronting for predatory lenders."
In Ahmed's case, her loan, with its 97.1 percent interest rate, didn't actually come from Personify Financial, the lender she found online. It was issued by a bank based in Utah called First Electronic Bank.
"Very little was going towards the principal balance," Ahmed says. "Most of it was going towards the interest. ... I was working my butt off, and it was like I wasn't making any progress."
A year after borrowing $2,300, her loan documents show she'd paid $1,930 just in interest and still owed $1,548 on the principal.
Saunders says First Electronic Bank has just one physical bank branch, but it makes these high-interest loans across much of the U.S. through this rent-a-bank scheme.
"It does normal things out of the branch, but it also has this side business of laundering loans for predatory lenders," Saunders says.
First Electronic Bank declined an interview. It said in a statement that it complies with the law and that it gives people access to loans "whether they have great credit or are excluded from the banking system due to a lack of credit history or past credit challenges."
Personify Financial also declined an interview but said in a statement that it helps smaller banks make more credit available to borrowers.
For her part, Ahmed worried that she was going to have to keep paying thousands of dollars more in interest on that loan.
"It was like I asked for help to dig out of this hole and just created a deeper hole for me to inhabit," she says. "I felt stuck."
But eventually she got unstuck. Ahmed paid the loan back with help from a nonprofit called Capital Good Fund that gave her an affordable loan with a much lower interest rate. So now, she can spend more of her paycheck on her son. She recently enrolled him in soccer and bought him cleats and a uniform.
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