Rhode Islanders are taking out risky loans from online 'rent-a-banks.' How it works.

The phrase "predatory lending" conjures up images of check-cashing joints in run-down neighborhoods.

But those old-fashioned storefronts are no longer the only place where Rhode Islanders who are struggling to make ends meet can turn for a loan. Instead, they might download a high-tech mobile app offering "earned wage advances," or borrow money though an online "rent-a-bank" scheme.

Either way, according to a policy brief from the Economic Progress Institute, they risk being hit with triple-digit interest rates – a surefire way to get trapped in a cycle of debt.

Advocates continue to push for legislation that would crack down on traditional payday lenders, which cleared the Rhode Island House of Representatives last year. But even if they're successful, they acknowledge, there will be more fights ahead.

"What we see right now as the biggest issue is getting the brick-and-mortar stores to shut down," Margaux Morisseau, co-chair of the Rhode Island Coalition for Payday Reform, told the Senate Committee on Commerce on Tuesday.

"Their marketing budget is humongous, and they really target low-income neighborhoods on purpose," Morriseau explained, describing how payday lenders in Woonsocket placed advertisements on pizza boxes. Going after those stores is the first step, she said, "and then we know that we will be here fighting for other predatory lending reform in the future."

Payday lenders warn of 'unregulated gray market'

For more than a decade, the same debate has played out before the General Assembly: Payday lenders argue that they're offering a service to people who would otherwise end up bouncing checks or facing late fees. Critics question why Rhode Island is the only New England state that allows them to charge triple-digit interest rates.

"I was also caught in the trap," Jessica Vega, a policy analyst at Rhode Island Kids Count, told the Senate committee. "I was desperate at the time."

As a 21-year-old who'd recently graduated from Rhode Island College, Vega recalled, she found herself struggling to pay for her car, her apartment and her student loans. At first, she only borrowed $400.

"When the day came that I needed to pay that loan, I couldn’t, so I had to add an extension, which added another fee," she said. "Things got so bad that I would go to a separate check-cashing place to pay the other check-cashing place, so now I had to borrow from two places, and I was robbing Peter to pay Paul."

Vega clawed her way out of debt eventually, she said, but only because she was able to move back into her mother's apartment while simultaneously working three jobs.

In 2019, payday lenders collected $7.6 million in fees from Rhode Islanders, according to Weayonnoh Nelson-Davies, the director of the Economic Progress Institute. State law caps interest rates for small loans, but it contains a major exception for payday lenders who hold a license to cash checks.

Senate Bill 2141 and House Bill 7211 seek to eliminate that loophole. While storefront lenders wouldn't strictly be forced to close down, they'd be prohibited from charging more than 36% annual interest – a major blow to their business model.

The problem, industry representatives argue, is that mainstream banking institutions haven't traditionally been eager to make small loans to low-income households.

"Restricting access to regulated lending products would only serve to drive desperate consumers toward far more precarious alternatives operating in unregulated gray markets," Allen Correia, the Rhode Island area manager for Advance America, said in his written testimony.

How online lenders profit from 'rent-a-bank' schemes

While advocates are primarily focused on repealing the check-cashing exemption, it's not the only loophole allowing Rhode Islanders to take on risky, high-interest loans.

Let's say that you need $2,000 for an unexpected expense. If you have good credit and a steady income, you can take out a personal loan from a traditional bank. Under state law, the interest will be capped at an annual percentage rate of 24%.

If you don't qualify, a quick Google search will point you to a number of online lenders that can potentially front you the money – but at rates as steep as 160% APR.

Those lenders are relying on the so-called "rent-a-bank" approach to circumvent state laws that limit how much interest they can charge, according to the Economic Progress Institute's policy brief.

Under federal law, state-chartered banks are only subject to the caps on interest rates that have been imposed by their home states. Lenders using the "rent-a-bank" model pay out-of-state banks to sign off on loans that they've arranged, then purchase those loans – sidestepping the interest rate caps that would otherwise apply in states like Rhode Island.

There's an easy way to put an end to this scheme, the EPI's policy brief points out: States can opt out of the Depository Institutions Deregulation and Monetary Control Act, the federal law that created the loophole. So far, however, only Iowa and Colorado have done so.

More: Should lawmakers end tax breaks for some of RI biggest companies? Why two lawmakers say yes.

Five "rent-a-bank" lenders — OppFi/OppLoans, EasyPay, Enova's NetCredit, LoanMart, and Check 'n Go's Xact — currently operate in Rhode Island and charge triple-digit APRs, according to the National Consumer Law Center.

Though the legislation being considered in the House and Senate is mainly aimed at storefront lenders, OppFi and the Online Lenders Association both submitted letters of opposition.

OppFi "supports the intention of S 2141 to stop predatory lending," Joe Rubin, the company's head of public policy, wrote in his testimony. "However, we also believe that whether a loan is considered 'predatory' should be based on more factors than simply the Annual Percentage Rate (APR) of the loan."

A new concern: Apps offering 'earned wage advances'

The newest kind of predatory lending, according to the Economic Progress Institute, is "a particularly deceptive one."

So-called "earned wage advances" are essentially payday loans by another name, according to the organization. Using certain mobile apps, workers can access the wages they've earned for shifts they've worked, rather than waiting a week or two for their next paycheck to arrive.

But they'll typically be charged fees for that convenience, which can quickly add up.

There are two different business models at play, according to the EPI. In the less nefarious of the two, an employer shares their payroll with a financial technology company, which then offers workers early access to their earnings.

Typically, there will be a cost for taking advantage of the service, but in the best case scenario, the employer absorbs it.

More: Quick cash, high price: RI lawmakers again seek to rein in 'payday lending'

The other, more problematic approach is a direct-to-consumer model in which a "fintech" app purports to offer early access to earned wages, but isn't actually connected to an employer's payroll. Loan payments are taken directly out of the borrower's bank account, rather than being deducted from their paycheck.

"To be clear, this is not the same thing as an ATM transaction by which someone withdraws money from their bank account," the EPI's policy brief notes. "This is a loan, accessing credit, and having to pay it back. Like with payday loans, the effective annual interest rates are in the triple digits, averaging over 300% APR."

It's also common for a borrower to need to take out another loan in order to pay off the first, according to the EPI. They also tend to use the service more often than traditional storefront payday loans – about 26 to 33 times a year, on average.

Since companies offering earned wage advances are already subject to existing state regulations, cracking down on bad actors doesn't require Rhode Island to pass new legislation, according to the EPI. Instead, the organization wants to see authorities investigate whether lenders are breaking local laws.

This article originally appeared on The Providence Journal: RI payday loan fight: Online services, apps raising new concerns