While we were distracted, a door opens for predatory lending

August 13, 2020

INDIANAPOLIS – There’s a lot going on right now. With COVID-19 cases rising even as schools attempt to reopen and Congress negotiates its next COVID-19 package, trying to keep up with the deluge of policy news feels like drinking from a firehose.  

Perhaps it is no coincidence that financial regulators have chosen this moment to pave the way for predatory lenders to operate freely throughout the country. In late July, the Office of the Comptroller of the Currency (OCC) proposed a new rule that would allow predatory lenders to partner with banks to evade state interest rate limits.

How will it work? Thanks to a 1970’s Supreme Court case, banks are able to export the interest rates of their home state. However, both regulators and courts have guarded against allowing this preemption to be “rented out” to predatory lenders seeking to evade state interest rate limits. The OCC’s new proposed rule, which declares the bank the “true lender” so long as it is named as the lender in the loan agreement, would enable predatory lenders to proliferate, charging triple-digit interest for loans that cause harmful debt cycles.

Another rule dismantling protections from predatory lending is the last thing we need right now. This would not help struggling working families or communities of color – often the targets of these schemes – weather financial storms or build wealth. It would sink them, further widening the inequality that has worsened through this financial crisis. Among Hoosiers, charging triple-digit interest rates is incredibly unpopular, with nearly nine in 10 Hoosiers wanting to see our policymakers clamp down on these rates.

In fact, this rule could undo the efforts of a coalition of veterans’ groups, faith leaders, non-profits, and community organizations to preserve the protections Indiana does have. In 2019, these organizations came together to defeat SB613, a legislative proposal that would have allowed the proliferation of high-cost installment loans in addition to payday loans. That bill passed the Senate by one vote and ultimately failed in the House when the bill’s architects could not garner the necessary support to pass.

The coalition’s win – and legislators’ wise decision not to allow these high-cost loans in Indiana – would be completely undermined by the OCC rule, which would give high-cost lenders a way to run right around our existing installment loan caps and charge the interest allowed by their rent-a-bank partner.

In fact, with the waters warming, banks are already wading in. National Consumer Law Center’s rent-a-bank watch list suggests that there are five lenders already using rent-a-bank schemes in Indiana. These same lenders are currently avoiding states with strong enforcement, so we have among the highest number in the nation, with some charging as much as 190% APR. We need to stop this predation.

Those who want to speak out against this harmful rule can comment to the OCC by Sept. 3. And, given the speed with which regulators may be able to undo all state-level protections under the cover of current chaos, it is even more imperative for Congress to set a national usury limit by passing the Veterans and Consumers Fair Credit Act, which extends the 36% APR cap protecting active duty military families to all citizens, so that no institutions can continue predatory activities anywhere in the United States. 

Macey, Ph.D, is a senior policy analyst for the Indiana Institute for Working Families and the Indiana Community Action Association.

Column link to original post: https://howeypolitics.com/Content/Columns/Columns/Article/Erin-Macey-While-we-were-distracted-a-door-opens-for-predatory-lending/10/20/24343