Why Some Online Loans Can Charge 150% APR Even Where It Is Banned
How Rent-a-Bank Loans Work
Rent-a-bank loans: Regardless of the interest rate cap in the borrower’s home state, state-chartered, FDIC-insured banks are permitted to export their home state’s interest rate to borrowers anywhere in the nation under a 1980 federal law known as the Depository Institutions Deregulation and Monetary Control Act. Although this regulation was designed to support lawful interstate banking, it left a gap. Some states, most notably Utah, do not even have a fixed interest rate cap; instead, they only forbid rates that are considered unconscionable, which is a much higher and more ambiguous standard.
Rent-a-bank loans: In order to formally originate the loan, online lenders that are not banks themselves collaborate with a small bank that is chartered in one of these states, most frequently Utah. On paper, the bank is the lender, but the fintech company is in charge of marketing, underwriting, and servicing. It also frequently purchases the loan or the economic interest in it shortly after it is originated. The loan may have an interest rate that the borrower’s home state would never permit if a local lender made the same loan directly because the bank on record is subject to Utah’s lax rate regulations.
Installment loans with triple-digit annual percentage rates are completely prohibited in 45 states and Washington, D.C. Borrowers in those states have been given loans with reported annual percentage rates (APRs) as high as 99 to 195 percent by lenders using this structure.
What Is the True Lender Doctrine?
Using what is known as the “true lender doctrine,” regulators and consumer advocates have retaliated, arguing that courts should consider who truly bears the economic risk and benefit of the loan rather than just who is listed as the lender on paper. It is argued that regardless of which bank actually originated the loan, the borrower’s state interest rate law should apply if that party is the fintech company rather than the bank.
Rent-a-bank loans: In court, the outcome of this argument has been inconsistent. In a case filed by California’s Department of Financial Protection and Innovation, a Los Angeles County court granted summary judgment in favor of Opportunity Financial, the company that created OppLoans, and its bank partner FinWise Bank in February 2026. Legal analysts have characterized that decision as a major victory for the bank fintech partnership model, one that is likely to impact similar disputes in other states, since it rejected the true lender argument in that particular case.
How States Are Challenging Rent-a-Bank Lending
Rent-a-bank loans: For some states, a different legal tool has proven more effective. States may completely opt out of the interest rate exportation authority for loans made to their own citizens under the same federal law from 1980. In November 2025, the U.S. Court of Appeals for the Tenth Circuit ruled in Colorado’s favor following litigation, enabling the state to impose its own rate caps on loans made by out-of-state banks. In that case, a petition for rehearing is still pending.
Rent-a-bank loans: This year, Oregon passed its own opt-out legislation, which specifically prohibits out-of-state banks from exporting their home rates to Oregon borrowers on consumer loans of $50,000 or less. Instead, those loans are subject to Oregon’s 36 percent cap. A similar bill is pending in Rhode Island, where it is estimated that since 2020, out-of-state lenders have given residents of Rhode Island over 31,000 high-interest loans, taking out over 61 million dollars. This month, New York introduced the most comprehensive version to date, a bill that would apply state usury law regardless of any contractual provision choosing a different state’s law. It would cover all parties involved in the lending chain, not just the original bank, such as marketers, servicers, Read complete artical click here
What is a rent-a-bank loan?
It is a lending arrangement in which a small, out-of-state bank and an online lender collaborate to originate a loan, enabling the loan to have an interest rate based on the bank’s home state instead of the borrower’s state’s interest rate cap.
Is this practice actually legal?
It is located in a legally contested area. While some states have successfully used a different legal tool to completely opt out of the underlying federal rate exportation rule, other courts have upheld these arrangements, such as a California ruling in February 2026 that favored the lender.
Why is Utah connected to so many of these loans?
Because Utah only forbids rates deemed unconscionable rather than imposing a fixed interest rate cap on consumer loans, banks chartered there are appealing partners for lenders looking to offer high rate loans nationwide. MORE guide about these topics available in pdf files
Comments
Post a Comment