A Trump rule paved the way for predatory lending. The window to invert it closes. – Mother Jones
Days before the November 2020 election, the Trump administration released a new rule that paved the way for a wave of predatory payday lending. Now hundreds of consumer advocates, more than two dozen Democratic and Republican attorneys general and many Democratic lawmakers are calling on Congress to overturn the rule, ahead of a fast-approaching government deadline that allows lawmakers to overturn regulations of the Trump era.
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 precedent to make it easier. for non-bank financial institutions, like payday lenders or fintech companies, to escape state interest limits, lend at exorbitant rates, and trap low-income customers in debt .
“If the rule is not reversed, predatory lending will explode in all 50 states,” says 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 operate as follows: 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 loan ownership hot potato: payday lenders attract customers who are willing to borrow money at high rates and then make an agreement with a bank that will distribute the loan money to those borrowers. The documents relating to the loan indicate that the bank is the originator of the loan. After the paperwork is complete, the bank resells most of the loan to the expensive lender (or an affiliate). So the result is that the payday lender impersonated a bank in an attempt to charge borrowers more money.
“Payday lenders and others find an unauthorized bank to put their name on the loan agreement and claim that gives them carte blanche to charge 200%. [interest] in states that only allow 36 or 24 percent, ”says Saunders.
For the two decades of existence, these types of schemes have been sidelined by the “true lender doctrine,” a legal principle that requires courts to determine the lender on a loan by assessing the actor who draws the loan. greater economic reward. the transaction. As attorneys general and financial regulators sought to tackle bank leasing schemes in the early 2000s, this standard served as a guarantee, allowing courts to assess whether high-cost lenders were camouflaging themselves to evade credit limits. interest rates, and ultimately curb the spread of these types of partnerships.
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 paperwork as the originator of the loan, nothing else matters, even if a payday lender actually administers the loan and collects the bulk. of its profits.
“It literally takes the paper form and elevates it above the substance of the loan,” North Carolina Attorney General Josh Stein explained during a Senate hearing on the rule last week. “Calling it the ‘real lender rule’ is a joke in reverse; it is more correct to call it the “bogus lender rule”. ”
Some payday lenders have already made use of the new rule to defend their use of bank rental systems. In September, a California veteran sued payday lender OppLoans for entering into a bank lease partnership with a Utah bank, granting it a loan at 160% interest, despite the rate cap 36% of California. The lender sought to have his lawsuit dismissed last January by invoking the brand new rule, which had come into force 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 restaurateur took out $ 67,000 in loans for his business during the pandemic that resulted in an effective interest rate of 268%, well above New York’s cap. York. She sued Axos Bank for engaging in a “bank leasing” program with World Business Lenders, the payday company that serviced her loan. The bank defended itself against its claims in a letter to the court last November, saying 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 of particular importance as Americans continue to weather the pandemic economic crisis and accumulate consumer debt. While many have used federal aid from the COVID era, like stimulus checks, to pay off debt, millions more have taken on more debt to survive 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.
The concern among consumer advocates is that this will intersect with the Trump administration’s rule of accelerating an ongoing trend: the disproportionate harm by payday lenders in black and Latin American communities. High-cost lenders have been found to focus their physical stores in communities of color, while their online counterparts target customers with lower credit scores, which themselves reflect racial wealth disparities.
“By sustaining and exacerbating an existing precarious financial situation, high cost loans reinforce and amplify existing income and wealth gaps and perpetuate discrimination today,” said Lisa Stifler, director of state policy at the Center for Responsible Lending, to a Senate committee. week. “Schemes to circumvent state interest rate limits 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 pursue other avenues. A group of eight state attorneys general are already challenging the rule in court, and it could also be overturned by even further rule-making 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 challenged Biden’s top pick, saying he was too friendly with the banks he would be tasked with regulating.