It was called “rent a bank.” In the 1990s and early 2000s, payday and car-title lenders got away with charging interest rates of 400-plus percent by paying banks to piggyback on their exemption from state usury laws.
Regulators and courts cracked down on those deals before Montana voters passed our own usury law, so we have had an easier time enforcing it. But now Congress is moving dangerously close to action that would give a fresh, nationwide lease on life to the peddlers of payday and payday-style installment loans. These loans are engineered to trap people in unaffordable debt for months or years at a stretch, so that they typically end up paying more in interest than the amount they borrowed in the first place.
The bill that would do this got the nod from a key House committee this week, and it has a handful of Democratic as well as Republican backers in both chambers of Congress. That’s why it’s crucial for uncommitted lawmakers to take a hard, close look at HR 3299, and 1642 in the Senate.
If they do, they’ll see that this innocent-sounding measure — pushed by “fintech” lenders presenting themselves as innovative and responsible alternatives to the loan-sharks — would, as a practical matter, reopen the rent-a-bank loophole for payday lenders, undermining the will of Montana voters.
It would do so by legalizing loans at any level of interest as long as they are nominally issued by a bank — even if they are immediately transferred to a payday lender, a debt collector, or another non-bank entity. The fintech universe itself contains disturbing examples of what’s in store. Elevate, one of the companies leading the charge for HR 3299, markets installment loans with interest rates as high as 365 percent through a partnership with Republic Bank – a model it is hungry to expand to places like Montana where that would currently be illegal.
There is nothing to prevent even worse players from adopting the same modus operandi. In fact, there is every reason to believe they will, for we are talking about an industry with a long record of charging as much as it thinks it can.
In 2010, Montanans voted not to let lenders charge more than 36 percent interest, effectively pushing predatory loans out of our state. Montanans have saved an estimated $37 million a year as a result.
Last month, the Consumer Financial Protection Bureau completed a set of national rules that payday lenders are pushing Congress to overturn. But lenders have already been migrating toward installment loans, which the CFPB rules do not cover. In any case, state interest-rate caps have proved to be the simplest and most effective answer to the abusive practices of payday lenders of both the short-term and installment varieties. Montana is one of 15 states that have used that approach to make triple-digit-interest consumer loans illegal across the board.
With one fell swoop, HR 3299 and S.1642 would undermine those laws, and make it impossible for other states to do the same. That’s why I am calling on Sen. Jon Tester, Sen. Steve Daines, and Rep. Greg Gianforte not just to vote “no” but to also take a strong public stand against this dangerous and ill-considered legislation.