A few days before the November 2020 election, the Trump administration Posted a new rule that paved the way for a wave of predatory payday loans. Now, hundreds consumer advocates, more than two dozen Democratic and Republican state attorneys general and many Democratic lawmakers are calling on Congress to reverse this rule, ahead of a fast-approaching government deadline that allows lawmakers to overturn Trump-era regulations.
Their concern is that the “real lender” rule – one of the latest steps taken by the Trump-era Office of the Comptroller of the Currency, a federal office that oversees nationally chartered banks – is shaking more than a century. legal precedents to make it easier. for non-bank financial institutions, like payday lenders or fintech companies, to escape state-level interest limits, lend at exorbitant rates, and trap low-income customers in the debt.
“If the rule is not reversed, predatory lending will explode in all 50 states,” said Lauren Saunders, associate director of the National Consumer Law Center.
According to its many detractors, this rule allows what are called “bank rental systems”. These first appeared in the early 2000s, and they work like this: In 45 states and the District of Columbia, long-term loans from non-bank businesses are subject to limits of. strict interest rates. To get around these limits, payday lenders have started teaming up with banks, which are exempt from state interest rate caps, in a kind of hot potato for loan ownership: payday lenders. bring in customers who are willing to borrow money at high rates, then make a deal. with a bank that will distribute the loan money to these borrowers. The loan documents indicate that the bank is the originator of the loan. Once these documents are completed, the bank resells most of the loan to the high-cost lender (or an affiliate). The result, then, is that the payday lender impersonated a bank in an attempt to charge borrowers more money.
“Payday lenders and the like find a dishonest bank to put their name on the loan agreement and claim they are giving them carte blanche to charge 200%. [interest] in states that only allow 36 or 24%, ”says Saunders.
For two decades that they have existed, these types of schemes have been sidelined by “true lender doctrine,” a legal principle that requires courts to determine the lender on a loan by weighing which actor gets the most money. economic reward the transaction. As state attorneys general and financial regulators sought to tackle bank rental programs in the early 2000s, this standard served as a safeguard, allowing the courts to assess whether high-cost lenders were camouflaging themselves to evade interest rate caps and, ultimately, to curb the spread of this type of partnership.
Critics say the Trump administration’s last-minute rule overrides that protection by telling the courts that the real lender is simply the one on the loan agreement. In practice, this means that as long as a bank is named on the documents as the originator of the loan, nothing else matters, even if a payday lender administers the loan and derives most of the money from it. its benefits.
“It literally takes the paper form and elevates it above the substance of the loan,” North Carolina Attorney General Josh Stein said. Explain during a Senate hearing on the rule last week. “Calling it the ‘real lender rule’ is a joke in reverse; it is more apt to call it the “bogus lender rule”.
Some payday lenders have already used the new rule to defend their use of bank rental programs. In September, a California veteran sued a payday lender OppLoans for entering into a bank leasing partnership with a Utah bank, granting it a loan at 160% interest, despite California’s 36% cap. The lender sought to have its lawsuit dismissed last January by citing the brand new rule, which had come into effect a few weeks earlier. OppLoans told the court that based on this federal rule, a national bank was the real lender of the loan and therefore had done nothing wrong.
In another case, a New York City restaurant owner took out $ 67,000 in loans for his business during the pandemic that resulted in an effective interest rate of 268%, well above the cap. from New York. She sued Axos Bank for engaging in a “rent-a-bank” program with World Business Lenders, the payday company that handled her loan. The bank defended itself against its claims in a letter in court last November, arguing that “as the Office of the Comptroller of the Currency recently made clear, even such arrangements are appropriate”.
In the months since President Biden’s inauguration, consumer groups and Democrats have stepped up calls on Congress to overturn the new rule through the Congressional Review Act. This federal law allows Congress to invalidate regulations issued by federal agencies within a certain time frame. The deadline for rescinding last-minute Trump-era regulations falls in mid-May.
The fate of this rule is particularly important as Americans continue to weather the pandemic economic crisis and rack up consumer debt. While many have used federal aid from the COVID era, like stimulus checks, to pay off debt, millions more have charged more debt cope during the pandemic. The need for quick, low-value loans like those offered by payday lenders will only grow as federal assistance programs, including expanded unemployment benefits, begin to expire this summer and fall.
Consumer advocates fear this overlaps with the Trump administration’s rule to accelerate an ongoing trend: the disproportionate prejudice of payday lenders in black and Latino communities. High cost lenders have been found to concentrate their physical stores in communities of color, while their online counterparts target customers with lower credit scores, which in turn reflect racial disparities in wealth.
“By maintaining and exacerbating an existing precarious financial situation, high-cost loans reinforce and amplify existing income and wealth gaps – and perpetuate discrimination today,” Lisa Stifler, director of state policy at the Center for Responsible Lending, Told a Senate committee last week. “The schemes to escape the limits of state interest rates therefore not only harm families in economic distress, but also exacerbate existing racial inequalities. “
If Congress chooses to leave the rule in place, consumer advocates say they will take other avenues. A group of eight state attorneys general is already difficult rule in court, and it could also be overturned by even more rules by Biden’s office of the Comptroller of the Currency. The Biden administration has yet to appoint a permanent director for the banking regulator, after some progressives contested with Biden’s alleged first choice claiming he was too friendly with the banks he would be tasked with regulating.