A Family Fell for a Rent-A-Bank Scheme. Now They Are Facing Foreclosure.

Your Money|A Family Borrowed $218,000 and Paid Back $240,000. Why Are They Facing Foreclosure?

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 shut down. When we couldn’t pay, they said they would take our house. This was a predatory loan, part of a rent-a-bank scheme. We need help, otherwise we will lose our family home of 60 years.

— Fred Urban, Brooklyn, N.Y.

Fred Urban’s situation is a classic study in how borrowers living in states like New York, which have consumer protections that cap interest rates, can still become entangled in loans carrying predatory rates, often with devastating consequences.

Mr. Urban, 58, and his wife own a German restaurant in Brooklyn called Schnitzel Haus. Just before the pandemic, they took out a loan with an interest rate that can both strain the eyes and play tricks with your mind: “0.147945205479 percent per day.” Multiply that by 365 days, and you arrive at their true interest rate — nearly 54 percent. But their loan documents didn’t describe it that way.

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 could the Urbans end up with a rate that’s double that? Through what is known as a rent-a-bank scheme.

Here is how the scheme typically works: The borrower, often someone who is financially distressed or has a weak credit profile, applies for a loan through a nonbank lender. To bypass state interest rate caps, the nonbank lender will partner with (or “rent”) a chartered bank in another state. The chartered bank is generally free to “export” the higher rates permitted in its home state. The bank typically sells most (or all) of the loan right back to the nonbank that initiated the deal.