The House Financial Services Committee considered testimony from witnesses on legislation that would implement an annual percentage rate cap for certain consumer loans.
"The Veterans and Consumers Fair Credit Act," H.R. 5050, would implement a usury APR cap for certain consumer loans (e.g., payday loans and car-title loans). Specifically, the bill would (i) extend the current 36-percent cap protections to all consumers, including veterans and their families, and (ii) create penalties unique to cap violations, and allow for civil court and state Attorneys General enforcement, without "preempt[ing] stricter state laws."
The Committee also considered testimony on predatory "rent-a-bank" schemes as further detailed in the House Staff Committee Memorandum. As previously covered, in late 2019, the OCC and FDIC proposed rules (see here and here) that would amend regulations concerning interest rates banks may charge their customers and clarifying the effect of a transfer on a loan’s valid interest rate. The controversial proposed rules are intended to address uncertainty raised by the U.S. Court of Appeals for the Second Circuit decision in Madden v. Midland Funding, LLC.
The following testimony was provided at a hearing:
Monique Limón, the California State Assembly on Banking and Finance Committee Chair, encouraged Congress to follow states like California and address rent-a-bank schemes by (i) advancing solutions that support state sovereignty, (ii) compelling the FDIC to stop supervised banks from allowing the evasion of state consumer protection laws and (iii) establishing a national rate cap at the 36-percent standard.
Graciela Aponte-Diaz, Director of Federal Campaigns at the Center for Responsible Lending, urged Congress to "step up" and protect consumers, stating that "bank partnerships" are allowing nonbank lenders to offer loans to consumers with rates otherwise illegal under state laws. In addition, she asked the FDIC and OCC to rescind their proposal concerning the rent-a-bank schemes, stating that it would instead encourage predatory lenders.
Ohio State University Moritz College of Law Professor Creola Johnson argued that rent-a-bank partnerships "are no better" than they were in decades prior. She stated that the partnerships enable payday lenders to use predatory practices, such as (i) ensuring that borrowers will be unable to repay loans and ultimately forcing them to default (a/k/a "debt entrapment"), (ii) finding methods that will produce a constant stream of fee payments from the borrower to the lender (a/k/a the "debt treadmill") and (iii) making borrowers fear arrest if they fail to repay their loans (a/k/a "debt criminalization").
National Consumer Law Center Associate Director Lauren Saunders criticized the FDIC and OCC proposal concerning rent-a-bank schemes, calling it "unnecessary, and . . . extremely dangerous for consumers and small businesses."
Brian Knight, Director and Senior Research Fellow at the Mercatus Center at George Mason University, highlighted an "important evolution in the credit markets," explaining that the increase in FinTech firm and bank partnerships has allowed borrowers to access credit on terms more beneficial than those from a traditional lender. He argued that innovation and competition in lending have facilitated heightened access to credit for borrowers typically underserved in the traditional market.