Q: We borrowed $218,000 from a company called World Business Lenders and paid back more than $240,000 – but they said we still owe $200,000. This happened during Covid when our business was closed. When we couldn't pay they said they would take our house. It was a predatory loan under a rent-a-bank program. We need help, otherwise we will lose our 60-year-old family home.
—Fred Urban, Brooklyn, NY
Fred Urban's situation is a classic study of how borrowers living in states like New York, which have consumer protections that cap interest rates, can still get caught up in loans with excessive interest rates, often with devastating consequences.
Mr. Urban, 58, and his wife own a German restaurant called Schnitzel Haus in Brooklyn. Shortly before the pandemic, they took out a loan with an interest rate that can both strain the eyes and fool the mind: “0.147945205479 percent per day.” Multiply that by 365 days and you get the actual interest rate – almost 54 percent. But it didn't say that in the loan documents.
In New York, interest rates on many consumer loans are generally capped at 16 percent, and charging more than 25 percent can lead to criminal usury charges (there are some exceptions). So how did the Urbans end up with a rate that was twice as high? Through a so-called rent-a-bank system.
Here's how the scheme typically works: The borrower, often someone who is struggling financially or has poor credit, applies for a loan from a non-bank lender. To avoid state interest rate caps, the nonbank lender partners with (or “rents”) a licensed bank in another state. The chartered bank is generally free to “export” the higher interest rates permitted in its home state. Typically, the bank sells most (or all) of the loan directly back to the non-bank that initiated the deal.
Who is the true lender in this situation? We'll come back to that.
In 2019, the Urbans inherited Mr. Urban's approximately 60-year-old family home in the Bay Ridge neighborhood of Brooklyn. Since it needed renovations, they decided to take out a loan for the renovations, which they thought they could also use for their restaurant and help their then 26-year-old son expand his own small business.
Mr. Urban said they wanted to borrow $100,000 to $150,000, but loan brokers, who secured a loan through New Jersey-based World Business Lenders, pressured the couple to take out a larger loan of $218,000. The brokers told the couple that they would help them close the loan they had taken out through their restaurant business within six months — and the Urbans trusted them because they had used these brokers for business loans in the past.
They were busy too. Just as the Urbans were finalizing the agreement, their lives were turned upside down. Her son suffered a severe seizure in early April 2020 caused by undiagnosed epilepsy and was declared brain dead. He remained on life support for several days while his family arranged for organ donation just as the global pandemic spread and businesses closed in New York.
The loan brokers “were adamant about getting us to close,” Mr. Urban said. “They called while we were in the hospital and texted all day to see if we had signed the paperwork. We asked to be left alone at the time, but they continued to harass us to get it done.”
What they signed remains unclear. He didn't realize, he said in an interview, that his house served as security. “If I had known,” Mr. Urban added, “I would never have taken out this loan.”
After the first month they had concerns and wanted to return the money. But the prepayment penalties, which Urban said were about $80,000, were too high. They had to make payments for two years – interest only for the first year – and a huge balloon payment at the end.
They initially owed World Business Lenders $2,257 a week, but ultimately it was an approved partner bank, Axos, that would file for foreclosure on their home after they defaulted on their payments. Their restaurant remained open — offering takeout, delivery and outdoor seating — but pandemic business was down and the couple still had to borrow from family, drain their savings and use “merchant cash advances” to make their payments to World Business.
World Business Lenders modified the loan several times when the Urbans missed payments, adding the arrears to the balance. But in July 2022 they were sent a reminder letter asking them to immediately repay the entire loan amount, otherwise their house would be at risk. Axos initiated foreclosure proceedings a few months later.
At this point, a little more than two years after they began this journey, Mr. Urban said they had paid back about $240,000 on the $218,000 loan – although he said they had only received about $185,000 after closing the loan after fees and closing costs.
The legal arguments challenging rent-a-bank agreements often revolved around which company served as the actual lender or who had the “overriding economic interest” in the transaction. In most cases, it is the non-bank lender, lawyers and legal experts said, as it is the company that typically handles the entire transaction – both the granting and subsequent execution of the loan and the collection of payments.
However, it can be difficult for borrowers to prove in court which company is the true lender. Adam Levitin, a professor at Georgetown Law University who published an article on rent-a-bank partnerships, said many of the facts needed to determine the true lender are often not publicly available.
In the past, Axos — which has offices in Nevada, which generally has fewer interest rate restrictions — sold these loans to World Business Lenders, experts said.
In the Urbans' case, Axos is the lender named in the loan documents and claims to have retained the loan, according to the legal documents. But as Professor Levitin points out, it is possible that World Business Lenders acquired an “interest” in the loan – a derivative interest rate that represents a large percentage of the note.
“The loan itself remains on Axos' balance sheet, so Axos is the party that 'owns' the loan, but almost all of the economic interest is transferred to WBL,” he said. “That's how a lot of other rent-a-bank arrangements work these days. It's all a beard.”
World Business Lenders did not respond to requests for comment. Axos declined to comment.
Although the Urbans' borrowing was secured by their family home, they received a business loan that offers far less consumer protection than a personal loan. In fact, under New York law, companies cannot claim civil usury, only criminal usury, which is more difficult to prove.
The Urbans argued, among other things, that Axos' loan was “criminally usurious,” invalidating the loan, and asked the courts to reject foreclosure. But Axos prevailed in court. The couple had filed for Chapter 13 bankruptcy to stop all debt collection activities and were trying to hire a new attorney.
The overall regulatory landscape remains complicated. At the end of the first Trump administration, the Office of the Comptroller of Currency issued a “true lender” rule, which stated that the bank is the lender in a partnership with a nonbank if it is named in the loan documents or finances the loan (even if it has sold the loan back to the partner). Consumer advocates said the rule paves the way for the proliferation of these and other high-interest schemes – and undermines states' ability to protect their residents.
It didn't take long. Congress repealed the rule at the urging of consumer advocates, a bipartisan coalition of attorneys general and others, and its resolution was signed into law by President Joseph R. Biden Jr.
Most recently, a federal appeals court in Denver ruled that Colorado could waive a federal law that allows state-chartered banks based elsewhere to export high interest rates to the state. That decision could pave the way for other states to do the same, although the ruling could be appealed, advocates said.
“A bank charter is a privilege,” said Adam Rust, director of financial services at the Consumer Federation of America, “not a ticket to get a share of the profits from regulatory arbitrage.”
Kirsten Noyes and Susan Beachy contributed to the research.