Closing a Lending Loophole Benefits Women & Families

Imagine that you’re a single mom, working full-time at a restaurant. You lose your job, your child has medical bills, and you still need to make rent. What choice do you have but to take out a loan? These short-term, small “survival loans,” usually under $5,000, loans are often taken out by women to meet their basic needs. Unfortunately, there are lenders who take advantage of desperate financial situations and tack on interest rates so high they are prohibited by state law. Lenders can charge up to 300% interest, which spirals borrowers into deeper debt, with few options out.

Advocates like Exodus Lending know the tactic well: It’s called “rent-a-bank,” and it exploits a loophole in federal law. Here’s how it works: A lender wants to loan to Minnesotans at high rates, but we don’t allow triple-digit rates in Minnesota on small loans. So lenders partner with a bank in a state that does allow a high interest rate. That lender, using the name of their bank partner, can then provide loans in Minnesota at the bank’s home state rate, which can be astronomical and near impossible to pay off.

As part of the Women’s Foundation of Minnesota’s impact area of economic justice, we target the root conditions of disparities by investing in people and pathways to economic well-being. We advocate for policy changes that benefit women and families like closing the loophole that allows predatory rent-a-bank lenders to evade MN’s interest rate caps on the WFM policy agenda.

Fairness in Lending

Minnesota lawmakers previously passed bipartisan legislation that capped interest rates on loans at 36%. Minnesota can opt out of the federal law that still allows Minnesotans legally to be charged more. Legislation proposed last session (HF 3680/SF3932) offered that solution, but it failed to pass.

In addition to advocating for pay equity, eliminating systemic barriers is key to dismantling the high cost of poverty for Minnesota. To advance this issue at the Capitol, the Women’s Foundation is partnering with Minnesotans for Fair Lending and Exodus Lending, a nonprofit that helps people escape the crushing debt of high-cost credit. The Attorney General, Minnesota Credit Union Network, the Center for Responsible Lending, and Legal Aid, among others, endorse closing this loophole. Predictably, the solution faces opposition from online financial services providers, often referred to as “fintech” companies.

This measure passed in Colorado last year but is being challenged in court. We’re hopeful that it will stand, and Minnesota can follow suit quickly. In anticipation of that result, it’s imperative that we work to educate legislators on the rent-a-bank scheme.

About the Issue

Families who don’t use or have access to checking or savings accounts are considered unbanked. They rely on other financial services, including cash, prepaid cards, and payday loans — and are more likely to use predatory lenders. “For single-mother households, the unbanked rate in 2021 was 15.9 percent, much higher than the unbanked rate among married couple households,” The rent-a-bank practice disproportionately impacts women of color. The Minnesota Deputy Attorney General compared predatory loans like these to a “concrete life preserver.”

What the Data Show

Our 2024 Status of Women and Girls+ in Minnesota report shows that families face extraordinary barriers to achieving economic stability.

In addition to nationally skyrocketing housing prices and food costs, working women face a pay gap that only accumulates over time. While Minnesota is a national leader in women’s workforce participation, women here still earn 81 cents to the dollar that men earn, but some women earn as little as 47 cents for every dollar earned by a man. The gender wage gap is more stark for women of color, who lose more than $1 million over a lifetime.

A significant portion of Minnesota mothers earn the most in their household. The overall poverty rate in Minnesota is lower than the national average, however single mothers’ income levels across racial and ethnic groups, and rural and urban areas, fall far short of the cost of living.

What You Can Do

• Contact your legislators and tell them about the rent-a-bank scheme, then ask them to support closing the lender loophole and ending the rent-a-bank’s impact on Minnesota communities

• Join us at the Capitol on Feb. 17 to advocate for WFM’s Policy Agenda

• Read last session’s bill

• Visit our policy partner Exodus Leading to learn more about their advocacy for Minnesotans trapped in predatory loan debt

• See the data and learn more about policy solutions that benefit women and families

• Sign up for WFM’s biweekly Policy Update email