In recent years, consumer finance protections withered through a series of harsh attacks that either outright rejected or significantly diminished financial guard rails in the marketplace. But a new consumer victory, urged by a groundswell of support from everyday people, academicians, and bicameral legislators signals an important step toward fair financial rules.
On June 30, President Joe Biden’s signature ended an ill-advised rule that favored predatory loans instead of America’s consumers. Predatory loans, such as payday loans, disparately impact African Americans and other people of color.
“These are so called ‘rent-a-bank’ schemes”, said President Biden at the June 30 signing ceremony. “And they allow lenders to prey on veterans, seniors, and other unsuspecting borrowers tapping in the — trapping them into a cycle of debt. And the last administration let it happen, but we won’t.”
Days earlier on June 24, a bipartisan vote of 218-208 in the U.S. House of Representatives sent a key financial rule change to the President’s desk. Just a few weeks earlier the Senate had passed the same bill with a bipartisan vote. Using authority from the Congressional Review Act, the votes sought to eliminate a recently passed regulation. In this case, the goal was to nix the Office of the Comptroller of the Currency (OCC) “fake lender” rule issued late in the Trump Administration.
As the nation’s seat of government, Capitol Hill is a place where an array of interests vies for both attention and influence. Lean-budgeted but principled public interest organizations can often find themselves disadvantaged by deep pocketed interests.
That’s why it’s important to acknowledge and celebrate overcoming stacked odds to forge changes that result in real life benefits for everyday people and small businesses alike. Especially for Black America and other communities of color, solid steps toward ending billion-dollar financial exploitation are particularly deserving of attention. Historically, we have already borne the brunt of predatory greed.
“Eliminating this harmful OCC rule will prevent more people from being exposed to high-interest loans that pull borrowers down deep into debt and despair,” said Center for Responsible Lending (CRL) Director of Federal Campaigns Graciela Aponte-Diaz. “Nixing the rule will curb the spread of predatory loans that target Black, Latinx, and low-income individuals – many of whom are struggling from the economic downturn. This action will allow states to protect their residents by enforcing their state interest rate laws.”
As reported previously in this column, OCC’s “True Lender” rule gave a green light to predatory lenders. By effectively overriding a string of state laws in almost every state enacted to prevent abusive payday, car-title, and installment loans with explosive interest rates of more than 100 percent took effect in late December 2020. Payday and high-cost installment lenders paid fees to banks for use of their name and charter to dodge state interest rate laws by claiming the bank’s exemption from those laws for itself.
Consumer advocates referred to the rule change as a ‘Fake Lender’ as the real lender is the predatory non-bank lender – not a bank.
Reactions to the successful consumer challenge soon followed. One of the first public comments came as a joint statement from two key U.S. Senators.
“Striking down the Trump ‘Rent-a-Bank’ rule will help prevent predatory lenders from ripping off consumers and charging loan-shark rates under deceptive terms”, noted Senator Chris Van Hollen of Maryland, a member of the U.S. Senate Committee on Banking, Housing, and Urban Affairs and co-sponsor of the resolution.
“The OCC, when it allowed banks to evade state interest rate caps, betrayed hard-working families and attacked states’ ability to protect their citizens from predatory loans,” added Senator Sherrod Brown of Ohio, the committee’s chair. “Congress showed the people we serve that we’re on their side.”
For California’s Congresswoman Maxine Waters, chair of the House Financial Services Committee, the resolution rids the nation of financial rubbish.
“The Trump-era ‘True Lender’ rule is a back-door way for nonbanks to charge triple-digit interest rates on loans at the expense of consumers in states where voters turned out to pass interest rate cap laws,” said Waters. “No wonder some call this the ‘fake lender’ rule.”
Just how much financial harm resulted from the ill-advised rule has been documented by the National Consumer Law Center (NCLC), a member of a diverse coalition that advocated repeal.
According to NCLC, predatory small business lenders are using the fake lender rule to defend a 268% annual percentage rate (APR) rate on loans totaling $67,000 to a Black restaurant owner in New York, where the criminal usury rate is 25%, and secured by property in New Jersey, where the legal limit is 30%. The lender pretended that the nominal participation of a bank based in Nevada justified its astronomical rate. Nevada has no interest limits on loans.
In another example, OppLoans (also known as OppFi), an online lender offers 160 percent APR loans in 26 states that prohibit triple-digit rate loans. This lender has also cited the OCC’s fake lender rule to defend its loan to a disabled veteran in California, where the usury rate on the loan is 24 percent. OppLoans is also evading state rate cap laws supported by broad majorities of voters in Arizona, Montana, Nebraska, and South Dakota. Even in states where legislatures have enacted rate caps, the fake lender rule would have essentially negated those rate cap protections.
For consumer advocates, along with their partners in the civil rights, faith, and veterans’ communities, revoking the fake lender rule is a step towards a national loan rate cap of no more than 36 percent.
Years ago, bipartisan enactment of the Military Lending Act awarded double-digit rate cap protections for men and women in uniform. It’s time for all of America to have the same financial protection.
Charlene Crowell is a Senior Fellow with the Center for Responsible Lending. She can be reached at Charlene.crowell@responsiblelending.org.