Stopping Predatory Fintech Lending | The Regulatory ReviewJanuary 14, 2021
Scholar argues that fintech firms engage in predatory lending.
Fintech has been touted as the solution to end financial exclusion. Proponents claim that fintech “will democratize finance, bank the unbanked, and furnish access to affordable credit for all.”
But is fintech lending predatory?
Christopher Odinet, law professor at the University of Iowa, argues that it is. In a recent article, he claims that fintech firms exploit partnerships with banks to engage in predatory lending. He asserts that banking regulators have even prevented state consumer watchdogs from acting against fintech firms because proponents have championed fintech as a financial access solution.
Odinet argues that financial regulators must update the banking regulatory landscape to protect consumers, especially as fintech lending to economically vulnerable households skyrockets during the coronavirus pandemic.
Household debt has reached an all-time high during the pandemic, in part due to a rise in online fintech borrowing. Over half of Americans lack the savings to cover their expenses, and these hand-to-mouth households have been devastated as the unemployment rate reached an unprecedented high. The relief funds Congress provided in March sustained one-third of households for only less than a month. Black and Hispanic households—already affected by disproportionately high poverty rates—experienced rising food insecurity.
During the pandemic, some fintech lenders have targeted low-income households and charged over 100 percent interest rates on loans. These practices, Odinet argues, are predatory.
Predatory fintech firms “take advantage of the special legal treatment given to banks” through fintech-bank partnerships. In these partnerships, fintech firms—which do not have licenses to lend—enter agreements with chartered banks. Customers apply for loans with fintech firms, which manage “the marketing, credit scoring, and underwriting” processes related to the loan. The partner bank, however, originates the loan. This arrangement enables fintech firms to lend without a license—and avoid the consumer protection requirements placed on banks.
Although fintech–bank partnerships operate under some regulations, these are not enough to prevent predatory fintech lending, Odinet argues. He describes two ways that fintech firms abuse gaps in the regulatory framework.
First, “avoiding usury laws is at the heart” of fintech–bank partnerships, Odinet claims. Usury laws regulate the interest rates lenders can charge on loans, and the laws can vary widely by state. Colorado, for example, allows interest rates up to 45 percent, while Virginia caps them at 6 percent.
Usury laws apply to fintech lenders, but banks have largely avoided the effects of usury laws. The National Bank Act allows nationally chartered banks to charge the highest interest rate allowed in any state in which the bank has a branch. If a nationally chartered bank operates in Colorado and Virginia, for…