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November 16, 2017
Several Democrats are currently trying to push through a bill that would embolden payday lenders by removing consumer finance protections. Senator Mark Warner (D-VA) introduced S.1642 in the senate earlier this year, and Rep. Patrick McHenry (R-TX) introduced the companion bill to the House. Warner’s co-sponsors include Senator Gary Peters (D-MI) and two Republicans. McHenry’s co-sponsors are Rep. Gregory Meeks (D-NY) and Rep. Gwen Moore (D-WI).
Georgetown Law Professor Adam Levitin broke down the bill in a September 2017 blog post. “It’s a predatory-lending facilitation bill. If the concern were to insulate legitimate business functions such as securitization with retained servicing or the sale of charged-off loans for collection, it would be possible to draft a narrow bill that protects these practices,” he wrote. “But that’s not what the McHenry-Meeks bill does. Instead, it enshrines a questionable legal doctrine known as the ‘valid-when-made’ doctrine that says that if a loan wasn’t usurious when made, it cannot later become usurious.”
If either bill passes, banks can make loans and sell them to payday lenders, who can then make them usurious, or skyrocket the interest rates to unreasonable amounts. Therefore, payday lenders and other non-bank lenders can use rent-a-bank agreements to create loans to circumvent state interest caps. Several states regulate payday lenders with usury caps to block loans with exorbitant interest rates, but national banks have more ways to circumvent these caps by originating loans in states that don’t have these caps, even if the borrower lives in a state that regulate them.
The bill is being touted as a way to provide greater access to loans for risky borrowers, but this is a misleading claim since the loan would originate from a bank, but then enable it to be sold for a fee to payday lenders of fintech companies who wouldn’t ordinarily be allowed to provide the loan. Democrats co-sponsoring the bill have tried to frame it as a positive by citing that it will increase access to loans for low-income individuals. “Instead of making credit more affordable or sustainable, H.R. 3299 would only make it ‘easier’ – and our nation’s disastrous experience with mortgage lending in the 2000s shows what can happen when state consumer protection laws are preempted in the name of easy ‘access to credit’ for consumers who cannot realistically afford it,” wrote the Leadership Conference of Civil Rights and Human Rights in a November 13, 2017 letter opposing the legislation.
In September 2017, 152 state and national organizations signed on a letter to oppose the legislation. “Strong state rate caps, coupled with effective enforcement by states, remain the simplest and most effective method to protect consumers from the predatory lending debt trap,” stated the letter. “Contrary to what lenders often claim, robust state loan laws do not drive people to find loans online. In fact, illegal online lending is more prevalent in states that do not effectively regulate predatory lending than it is in states that enforce state interest rate caps.”
The letter notes that the bill overrides the Madden Second Circuit Court decision after the Supreme Court refused to hear the case despite demands from the financial industry. Defenders of the bill have cited a study showing three lenders whose lending decreased after the Madden decision, but those lenders offered very little credit even before the decision to higher risk borrowers. The Madden decision upheld that debt buyers from national banks could not benefit from evading state interest rate caps.The organizations opposing the bill include the NAACP, Southern Poverty Law Center, and PIRG, while the payday lender and financial industry overwhelmingly support it.
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