In the coming weeks, the House of Representatives will face an important vote on rolling back a Trump-era regulation that would let predatory lenders, in cahoots with Wall Street, evade consumer protections that help ordinary people avoid getting trapped in debt.
President Biden’s new appointees are starting to turn the ship away from policies that benefit Wall Street and predatory lenders. But only House lawmakers can stop the march of these modern-day loan sharks, and they need to act as soon as possible. It’s good policy and great politics, among Democratic and Republican voters.
In a last-minute move, Trump regulators approved rules that would let predatory lenders, who peddle loans with triple-digit interest rates, launder their services through banks. Because these banks are exempt from state interest rate limits, the rules would open the door to the practice of predatory lending even where voters and state lawmakers have specifically banned it. (See an illustration of the process here.)
This arrangement is often called “rent-a-bank” because banks offer the loan, but predatory lenders immediately purchase the loan from the bank. With a typically Orwellian flair, federal banking agencies under Trump called it a “true lender” rule, but banks are really fake lenders; they serve as a front for this predation, which is already in full swing because the Trump-appointed regulators did their best to enable predatory behavior in all sorts of ways across the government.
The Senate already did the right thing, in bipartisan fashion no less, by passing the Congressional Review Act, which Trump and the Republicans used to destroy important Obama-era rules. Three Republican senators, Marco Rubio (Florida), Cynthia Lummis (Wyoming), and Susan Collins (Maine), all voted to nix this awful regulation. Now, the House needs to follow suit.
These rent-a-bank loans are particularly egregious because they are designed to deceive. Imagine the consumer who sees the loan offer with a bank’s name on the paperwork and the usual guarantees about FDIC insurance and the like. But when the payments are due, the consumer is being pursued by Loan Sharks Inc.
For example, after California adopted an interest rate cap on loans above $2,500, CURO — which operates the SpeedyCash and RapidCash brand of payday and high-cost installment loans — brazenly announced that “bank partnerships are great.” The banks are facilitating interest rates of 100% and higher.
To make matters worse, these kinds of predatory loans often mix the money of Wall Street with the slick marketing of Silicon Valley. Many of these lenders style themselves as innovative “fintechs” that are all about the good of the consumer. They’re not, but they have a lot of money. Enough to tempt some Democrats in the House to side with them or even do their bidding.
This problem is a national one. Nearly every state has rate caps on longer-term installment loans. But only 18 states and the District of Columbia represent the more than 110 million Americans that are protected by strong rate caps on short-term loans (payday loans); Nebraska and Illinois passed their measures in the past several months. Ideally, Congress would pass a national law capping interest rates, but for the moment, it needs to stop the spread of predatory lending.
Predatory lending is a financial danger amidst a global pandemic that has hit low- and moderate-income families and communities of color, especially Black, Latino, and Native American communities, particularly hard due to underlying health and socioeconomic disparities.
These high-cost loans promote access to debt rather than the advertised credit, resulting in a trap of never-ending debts that are rolled over repeatedly. They leave borrowers with a ruined credit score, unable to borrow at lower interest rates even after the pandemic. We won’t build back better with Internet-era loan sharks.
American voters strongly support state rate caps on a bipartisan basis and don’t want to see federal rules that make them meaningless. In November 2020, 83% of Nebraska voters supported a rate cap ballot initiative to place a 36% interest rate cap on payday loans. It joined states like Arizona, Colorado, Montana, and South Dakota, where strong bipartisan votes in recent years illustrate the public’s overwhelming support for anti-usury laws. In states that are deep blue or ruby red, 70% of voters across party lines support a 36% rate cap.
They surely don’t want to see astronomical interest rates because Congress didn’t act in time. It’s time to wipe this regulation off the books.
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