It was love at first sight. Kaleigh Clemmons walked into a Virginia pet store and knew she had to have a 12-week-old Australian shepherd she would name Arlo.
She applied for a loan on the spot, agreeing to $5,000 with a 24% interest rate. She then signed the contract, which was emailed to her the following day.
But when Clemmons checked her email, she found another contract for an additional loan that she didn’t remember signing. The email was from a different loan company, for a nearly $3,000 loan for a different puppy package kit from the same pet store.
The kit, which included food, pet toys and a warranty, had a whopping 134% interest rate.
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“It was very overwhelming," Clemmons said.
Clemmons did not purchase the puppy kit, but when she contacted the pet store, they insisted that she did. When News4 reached out to the pet store, they provided two separate loan contracts with electronic signatures from Clemmons on both.
Now, Clemmons is expected to pay both loans, which will end up costing her an additional $8,500 on top of the $5,000 she already owes.
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Putting off paying the high-interest loan could put Clemmons in financial jeopardy.
"That messes up my credit and everything!" Clemmons said.
Lauren Saunders, a lawyer for the National Consumer Law Center, says that what happened to Clemmons is a perfect example of predatory lending.
“We are seeing predatory lending on the internet, through websites, and we’re also seeing it in the oddest places, like in pet stores … People go into a store and they fall in love with a puppy and they can be expensive ... they can offer financing ... and before you know it, people are caught in a 150% interest rate loan," Saunders said.
Although many states have laws against charging high interest rates, some lenders are finding loopholes, Saunders said.
“They found this loophole we call a ‘rent-a-bank’ lending where a predatory lender puts a bank’s name on the paperwork and says that gives them the right to ignore the law and charge 150 to 200%,” Saunders said.
Banks are exempt from most state interest rate laws. While most don’t gouge their customers with outrageous prices, the NCLC has found a small number of rogue banks that do.
This predatory scheme works because a bank agrees to put its name on the loan to make it look like a bank loan so it doesn’t have to comply with interest rate limits, Saunders said.
This makes it possible for some lenders to avoid state caps on interest rates, and the government is aware of this. A number of consumer protection groups, including Saunders’, are calling on the government to ban this practice.
“The FDIC regulates the banks that are helping these predatory lenders charge 150 to 200%, and so we are urging the FDIC to tell the banks, 'No, you don't have a right to front for predatory lenders,'" Saunders said.
News4 reached out to the FDIC, which said it “will not comment at this time.”
Luckily, there are ways to protect against predatory loans. Before agreeing to sign a loan on the spot, ask to take the paperwork home to read the entire contract. If the interest rate seems extremely high, it might be a predatory loan. Walk away from the deal.
For Clemmons, News4 contacted the loan company that was charging her 134% on the $3,000 loan. It agreed to cancel the transaction but hasn’t answered questions about using rent-a-bank.