Proposed Federal Rule Will Undercut State Lending Protections, AGs Warn

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The attorneys general are concerned about a strategy that high-cost lenders can use to get around state interest rate caps.

A group of two dozen mostly Democratic attorneys general are voicing strong opposition to a proposed federal rule that they say would provide “payday” and other high-cost lenders with a way to evade state regulations capping interest rates. 

The Federal Deposit Insurance Corporation announced the proposal in November. The AGs argue in a comment letter submitted this week that the agency’s pending rule would enable lenders to circumvent state usury laws by engaging in so-called rent-a-bank schemes.

“At a time when Americans of all political backgrounds are demanding that loans with triple-digit interest rates be subject to more, not less, regulation, it is disappointing that the FDIC instead seeks to expand the availability of exploitative loans,” the state attorneys general wrote.

The FDIC has said that the newly proposed rule is meant to clarify federal law governing interest rates that certain banks may charge their customers, and that it is intended to address “marketplace uncertainty” that came in the wake of a 2015 federal court ruling.

With the proposed guidance, the agency says that it aims to make clear that an allowable interest rate on a loan, as permitted by law where a bank is located, would not be affected by subsequent events, like changes in state law, or the sale of the loan to a non-bank business.

Under federal law and Supreme Court precedent, national banks can charge the maximum interest rate that is allowed in the state where they are located, even for customers in states that have laws that require interest rates to be lower than that level.

Rent-a-bank arrangements, as the AGs describe them, involve banks acting as lenders in name only, but passing along their exemptions to state interest rate laws to non-bank entities—including those trafficking in “payday” loans and other forms of high-interest debt.

The AGs are urging the FDIC to withdraw the proposed rule.

Their position is that the agency lacks the authority to preempt state laws on behalf of non-bank businesses. They also argue that the proposal amounts to a violation of the federal Administrative Procedure Act. And they say the guidance would be “bad policy that will open the floodgates to exploitative and predatory loans that trap consumers in a cycle of debt.”

California Attorney General Xavier Becerra is among the state officials who raised concerns about the proposed rules. “Inexcusable is the only way to describe the FDIC’s utter lack of concern for vulnerable communities targeted by predatory lenders,” Becerra said. 

“We recently adopted new rate caps in California to protect consumers. The federal government should be looking to do the same—not creating loopholes that benefit shady actors,” he added.

Lawmakers in California last year approved a lending rate cap of about 36% that specifically targeted “installment loans” with principals between $2,500 and $10,000.

State figures show that, in 2017, California lenders made about $1.1 billion of loans in that dollar amount range that had fee and interest rates over 100%. This was a sharp rise from 2009 when lenders in the state issued only $26 million of installment loans with rates that high.

Caps on interest rates are now common around the U.S., creating an incentive for some high-cost lenders to look for workarounds.

The National Consumer Law Center said last March that more than three-quarters of states had capped the maximum interest rate and fees, or APR, on small- to mid-sized installment loans. 

Among 43 states and D.C., the median APR maximum for $500 six-month loans is around 36%, the group said. The median for $10,000 five-year loans among 38 states and D.C. was 25%.

The law center, which is a consumer rights nonprofit that has been around since the 1960s, has also assailed the FDIC’s proposal, warning that it “threatens to eviscerate the ability of states around the country to limit interest rates to protect their residents.”

In November, the group said online lenders have become “increasingly bold” using rent-a-bank arrangements to offer loans with up to 160% interest rates in states where those rates would otherwise be illegal.

FDIC Chair Jelena McWilliams has emphasized that the agency takes an unfavorable view of arrangements in which entities partner with banks for the sole purpose of evading state interest rate restrictions.

But the state AGs argue that the proposed rule fails to answer important questions related to these sorts of arrangements, including how a key term is defined and exactly which partnerships the agency would look upon favorably or unfavorably.

“The FDIC ignores the consumer harm that is all but sure to ensue if rent-a-bank schemes are allowed and encouraged,” the state officials added in their comments.

New York Attorney General Letitia James and Illinois Attorney General Kwame Raoul joined Becerra in leading the coalition of attorneys general that submitted the comments. Tennessee Attorney General Herbert Slatery was the only Republican in the group.

Bill Lucia is a senior reporter for Route Fifty and is based in Olympia, Washington.

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