In a tone-deaf maneuver of “hit ’em while they’re down,” we now have a proposal by the Office of the Comptroller of the Currency (OCC) that is bad news for people attempting to avoid unrelenting cycles of high-cost debt. This latest proposal would undo long-standing precedent that respects the right of states to keep triple-digit interest predatory lenders from crossing their borders. Officials in Maryland should take notice and oppose this appalling proposal.
Ironically, considering its name, the Consumer Financial Protection Bureau (CFPB) most recently gutted a landmark payday lending rule that would have required an assessment of the ability of borrowers to afford loans. And the Federal Deposit Insurance Corp. (FDIC) and OCC piled on, issuing rules that will serve to encourage predatory lending.
But the so-called “true lender” proposal is particularly alarming — both in how it hurts people and the fact that it does so now, when they are in the midst of dealing with an unmanaged pandemic and extraordinary financial anxiety. This rule would kick the doors wide-open for predatory lenders to enter Maryland and charge interest well more than what our state allows.
It works like this. The predatory lender pays a cut to a bank in exchange for that bank posing as the “true lender.” This arrangement allows the predatory lender to claim the bank’s exemption from the state’s interest rate cap. This ability to evade a state’s interest rate cap is the point of the rule.
We’ve seen this before. “Rent-A-Bank” operated in North Carolina for five years before the state shut it down. The OCC rule would remove the basis for that shutdown and let predatory lenders legally launder their loans with out-of-state banks.
Maryland has capped interest on consumer loans at 33% for decades. Our state recognizes the pernicious nature of payday lending, which is hardly the quick relief the lenders claim. A payday loan is rarely a one-time loan, and lenders are rewarded when a borrower cannot afford the loan and renews it again and again, pushing the national average interest rate paid by borrowers to 400%. The CFPB has determined that this unaffordability drives the business, as lenders reap 75% of their fees from borrowers with more than 10 loans per year.
With access to their borrowers’ bank accounts, payday lenders extract full payment and very steep fees, regardless of whether the borrower has funds to cover the loan or pay for basic needs. Most borrowers are forced to renew the loan many times, often paying more in fees than they originally borrowed. The cycle causes a cascade of financial problems — overdraft fees, bank account closures and even bankruptcy.
“Rent-a-bank” would open the door for 400% interest payday lending in Maryland and give lenders a path around the state’s caps on installment loans. But Maryland, like 45 other states, caps longer term installment loans as well. At higher rates, these installment loans can catch families in deeper, longer debt traps than traditional payday loans.
Payday lenders’ history of racial targeting is well established, as they locate stores in communities of color around the country. Because of underlying inequities, these are the communities most impacted by our current health and economic crisis. The oft-cited reason for providing access to credit in underserved communities is a perverse justification for predatory lending at triple-digit interest. In reality, high interest debt is the last thing these communities need, and only serves to widen the racial wealth gap.
Comments to the OCC on this proposed rule are due September 3. Everyone concerned about this serious threat to low-income communities across the country should say so, and demand the OCC rethink its plan. These communities need fair credit, not predators. Especially now.
We should also support H.R. 5050, the Veterans and Consumer Fair Credit Act, a proposal to extend the cap for active-duty military and establish a cap of 36% interest on all consumer loans. If passed, this would eliminate the incentive for rent-a-bank partnerships and protecting families from predatory lending everywhere.
There is no reason a responsible lender cannot operate within the interest rate thresholds that states have imposed. Opposition to such a cap is based either on misunderstanding of the needs of low-income communities, or out-and-out support of a predatory industry. For a nation experiencing untold suffering, permitting schemes that evade state consumer protection regimes only cranks up the opportunities for financial exploitation and pain.
Sarah Bloom Raskin is the former deputy secretary of the Treasury, a former governor of the Federal Reserve and a former Maryland commissioner for financial regulation. Whitney Barkley-Denney (Whitney.Barkley@responsiblelending.org) is a senior policy counsel at the Center for Responsible Lending.