Minnesota failed to close loophole allowing triple-digit interest on loans

Out-of-state companies can continue to charge consumers in Minnesota triple-digit interest rates on loans after efforts to enact stronger protections failed at the state legislature

Consumer advocates and state lawmakers say countless borrowers are still at risk of getting "trapped in a debt cycle" as the loan industry pushes back on reform efforts across the country.

"Companies who don’t even have a footprint in Minnesota are now coming in and trying to get the best deal they can out of Minnesotans and off the backs of these hardworking folks," said Rep. Carlie Kotyza-Witthuhn (DFL- Eden Prairie), who sponsored legislation that failed to gain traction this session. 

RELATED: New Minnesota laws starting July 1 that could affect you

Minnesota is just one example of the many hurdles advocates face nationwide as they try to close a so-called lender loophole. It allows companies to evade state interest caps on certain loans – sometimes charging borrowers upwards of 300% interest. 

"It’s greater indebtedness for a longer period of time," said Anne Leland of Exodus Lending, a nonprofit that has helped Minnesotans get out from under high-interest loans. 

In Minnesota, state law currently caps interest rates at 50% on certain loans. 

However, a FOX 9 Investigators review of loan documents and corporate financial records revealed out-of-state companies are using a loophole in federal law to charge rates well above that. 

Rent-a-bank Loophole

The tactic known as "rent-a-bank" uses a loophole in federal law, which out-of-state lenders have used for decades to evade state interest rate limits. 

Christine Westbrook applied for her loan online through OppFi, a financial tech company that last year issued 17,000 loans to Minnesotans alone. 

"I applied for it and I got approved the same day," Westbrook said. "I was really shocked because it was really quick." 

Westbrook was approved for $1,000 but with a soaring interest rate of nearly 160%. It could have cost her almost $800 more than she originally borrowed.

"At the time, I was vulnerable, broke and I needed it," Westbrook said. "It was like a stranger trying to get a kid with a candy bar." 

OppFi is physically based in Chicago, but partners with a state-chartered bank in Utah where there are no limits on interest rates. 

This allows OppFi to charge triple-digit rates even when customers like Westbrook live in states where interest rates are supposed to be capped.

"The rates, we think, are justified based on the risk," said Joe Rubin, senior vice president of OppFi’s corporate communications. "Even though the rate may be high, the loans that we facilitate are transparent, so there are no fees, no late fees, no insufficient check fees."

Westbrook is now repaying a more manageable interest rate after seeking assistance from Exodus Lending.

Industry pushback

Minnesota was one of several states this year that pushed to prevent online lenders from charging its residents triple-digit interest rates on certain loans. 

Consumer advocates call it "the next wave" of efforts to protect consumers from predatory lending. 

"We tried really hard this session to find bipartisan support," said Rep. Kotyza-Witthuhn. "I think we're really close."

Minnesota, along with states across the country and the District of Columbia, faced a lobbying blitz from the financial tech industry resisting legislative reforms. 

Online lenders even filed a federal lawsuit to stop a newly passed law in Colorado from taking effect July 1. A federal judge agreed to temporarily block the Colorado law, ruling that the companies would "suffer irreparable harm" if allowed to take effect. 

Consumer advocates and lawmakers in Minnesota are monitoring how the case in Colorado proceeds to gauge how it might impact future efforts to close the lender loophole.

The sponsor of Minnesota’s stalled legislation intends to revive the bill next year. 

"When people are skirting the laws – the existing laws that we have in order to make an extra buck – it's a problem," said Rep. Kotyza-Witthuhn. 


Minnesota capped loan interest rates but some banks still charge 150%

Loan documents and corporate financial records reviewed by the FOX 9 Investigators show companies are regularly charging triple-digit interest rates. One loan came with a rate of nearly 350%.