How Cartoon Bears & Lending Lions Move in Usurious Ways
How fintech is paving a path for payday predators
The fintech industry — nonbank and neobank entities offering services (like short-term loans) that are similar to bank offerings — is facing new scrutiny.
This according to the latest report in Fintech Business Weekly:
The CFPB has also recently upped its rhetoric on so-called “rent-a-bank” arrangements used by fintech lenders, particularly those using them to originate loans above states’ usury caps.
While the lending question is somewhat distinct from “banking-as-a-service,” the consumer regulator could see them similarly, particularly as fintechs like Dave (partnered with Evolve) and MoneyLion (partnered with MetaBank) offer short-term loans and as more BaaS platforms offer credit products.
I’ve written a lot about these “rent-a-bank” schemes and about fintech lenders like Dave and OppFi and their persistence in finding ways to evade state interest rate caps and charge triple-digit interest rates on short-term loans.
The MoneyLion case is particularly egregious — here’s a note on how they got caught charging more than 600% interest rates to Minnesota consumers:
MoneyLion violated Minnesota state law by failing to be licensed by the state when it provided Minnesota-based consumers with certain loans with excessive annual interest rates of up to 645%. The settlement includes more than 700 loans issued to Minnesota consumers between November 7, 2016 and September 15, 2017. These loans ranged from $300 to $2,000 and MoneyLion charged interest rates from 9.79% to 645%.
With practices like these, it seems the added scrutiny is warranted.
That is, of course, unless we are willing to accept a fintech model where anything goes and consumers are left to the whims of whatever algorithms and ingenuity make possible in terms of extracting profits.
I mean, that cartoon bear on the Dave app sure seems friendly, but a story in the L.A. Times notes that the bear in your phone who gives out fast cash is charging up to 547% for the service
Here’s how the Times broke down the fees associated with a loan from Dave:
Given that the money had to be repaid in 12 days, the $5.99 fee and $2 tip, if considered as interest, cost Goad 122% on an annual percentage rate basis — a metric that helps compare the relative cost of loans. If he tipped $6.93, the company’s average in the first quarter, it would amount to an APR of nearly 200%. If he chose a 15% tip, the total cost would rise to $35.99 with an APR of 547% — corner payday loan territory.
A lending lion with 645% loans. A cartoon bear charging 547%.
This is the world brought to us by fintech — where bright entrepreneurs are lauded for their ability to find new and innovative ways to evade consumer protection laws and trap the most vulnerable customers in a cycle of debt.
In short, the attention focused on these bad actors is long overdue and could provide some welcome relief to consumers.
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Waging a War on “Junk Fees”
The Consumer Financial Protection Bureau (CFPB) is moving to reduce or eliminate so-called “junk fees” in the banking and credit card space.
Jason Mikula in Fintech Business Weekly reports on the most recent move by the CFPB to take on credit card fees:
“. . . the CFPB is now taking aim at credit card penalty fees, which the consumer protection agency says cost consumers some $12 billion per year. Late fees make up 10% of the total cost of credit cards to customers, according to the bureau.
The fees are also disproportionately paid by lower-income and subprime card holders.”
CFPB Director Rohit Chopra has made clear his disdain for such fees and has stated a desire to see these fees significantly reined-in:
“Many credit card issuers have made late fee penalties a core part of their profit model. Markets work best when companies compete on price and service, rather than relying on back-end fees that obscure the true cost.” said CFPB Director Rohit Chopra. “Given their current practices, we expect that credit card issuers will hike fees, based on inflation, as limits continue to rise.”