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Written by Joe Valenti and Jessica AcMoody
Today, the House of Representatives votes on an end run around state consumer protection laws. If it passes, the bill would overturn state efforts to stop payday lenders from charging triple-digit annual interest rates and creating consumer debt traps that can turn a $1,000 loan into a $40,000 debt.
The bill—misleadingly titled “Protecting Consumers’ Access to Credit Act of 2017”—claims to be a response to a recent federal court decision in a case called Madden v. Midland. Ms. Madden opened a credit card; when she fell behind on payments, it was sold to Midland Funding, a debt collector. Midland tried to charge her an interest rate of 27 percent, higher than New York’s legal limit of 25 percent, and the judge ruled that while banks are not subject to state interest rate caps—consistent with rulings going back several decades that led to the rapid growth of credit cards—nonbanks, such as a debt collector, are. The decision was reached by the Second Circuit, and only applies to New York, Connecticut and Vermont.
In the bill, both houses of Congress have proposed a so-called “Madden fix” that would declare that any valid loan made by a bank stays valid if that loan is later sold or transferred to a nonbank. On its face, that sounds fair—until it’s clear that this is exactly the business model, sometimes called rent-a-bank, that payday lenders have historically used to get around state consumer protection laws. Under rent-a-bank, in a state that caps annual interest rates at 36 percent or less—a level considered the maximum for responsible lending for about a century—a loan shark shut out of the market can just partner with a national bank that’s subject to no limits on interest rates at all, and charge consumers more than 300 percent annual interest or more. This practice goes back two decades, and federal banking regulators have been grappling with it just as long.
Getting around state laws also means skirting the will of Americans that have elected to keep predatory lenders out of their states. Fifteen states and the District of Columbia—representing more than 90 million Americans—have set interest rate caps to keep payday lenders at bay. South Dakota joined this club in 2016 with a ballot initiative receiving more than 76 percent of the vote, despite confusing, contradictory language on the ballots. Seventy-two percent of Montanans voted for a cap in 2010. And faith leaders across the country have decried the practice—some even using their own community assistance funds to bail out borrowers trapped in debt.
Even in states where payday lending is not restricted with a rate cap, forty-two states have interest rate caps in place for some other types of loans, such as installment loans, which are generally paid back over a longer period of time. It’s no surprise that the Consumer Financial Protection Bureau’s (CFPB) 2017 payday lending rule specifically called out rate caps as providing better protections than what it could do itself to deal with debt trap lending. (The Dodd-Frank Act, which created the CFPB, specifically bans the agency from capping rates itself.)
Taking away states’ ability to pass and enforce laws that protect their residents from loansharking might not be so devastating if a tough federal standard existed in their place. But this January, CFPB Acting Director Mick Mulvaney delayed the final payday rule, which only dealt with certain aspects of predatory lending, with an eye toward weakening or scrapping it altogether. New Trump-appointed leadership at the banking regulators are not likely to scrutinize rent-a-bank partnerships the way past regulators have, and the Office of the Comptroller of the Currency, one of these regulators, reversed its restrictions on banks themselves making payday loans last year. The closest Congress has come to taking decisive action to help vulnerable borrowers in recent years was passing the bipartisan Military Lending Act in 2007, which put in place a 36 percent rate cap on servicemembers and their families—and still only survived an effort to weaken it in 2015 by one House committee vote.
To be sure, some nonbank lenders who do not make payday loans have argued that the Madden decision makes it harder for even responsible startups to lend nationwide because investors will not support them if loans may be invalidated under state law. But they have other options, including seeking a federal nonbank charter or simply ensuring that they comply with state law. Supporting a nationwide market should not mean forcing open the doors to financial exploitation by allowing lending without limits.
Should the House bill pass this week, it then goes to the Senate, where a bipartisan group of senators has teamed up to co-sponsor the same bill. In an era of massive tax cuts for the rich and devastating benefit cuts for everyone else, this is merely the latest attempt from Congress to tilt the financial playing field further in favor of corporations and the wealthy, making it even harder for working families to get by.