Congress Has a Chance to Overturn Trump’s Rent-A-Bank Rule

In November 2019 — before quarantine, social distancing, and a year straight of unemployment insurance claims higher than the worst week of the Great Recession, back when the idea of paying millions of dollars for GIFs seemed unimaginable — the Trump administration’s Office of the Comptroller of the Currency (OCC) quietly introduced a new banking rule to circumvent dozens of state laws designed to protect low-income people from exploitation. The “rent-a-bank” or “fake lender” rule, as it’s being called, allows non-bank lenders (such as payday loan lenders) to launder their loans through nationally chartered banks in order to get around state interest rate limits. This rule, which went into effect in December 2020, upends almost two centuries of U.S. banking law and could trap millions in debt, unless Congress acts soon to overturn it.

Usually, people associate predatory lending with payday loans. And it’s common knowledge exactly how awful payday loans are: 12 million people84 percent of whom have family income under $40,000 — are subject to annual percentage rates (APRs) around 400 percent to borrow just a few hundred dollars. These rates trap borrowers in long debt cycles of constant loan renewals. The typical payday loan consumer will spend almost 200 days — more than half the year — in debt, and two-thirds will renew at least seven times, meaning they ultimately pay more in interest and fees than the original amount they borrowed.

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Recently, however, there’s been a significant shift from payday loans to slightly bigger, slightly longer term installment loans. While payday loans are mostly under $500 with two-week terms, installment loans generally range from $500 to $2,000 (though they can reach $10,000 or higher) and offer terms of 6 months to 2 years or longer, with APRs around 100 percent to 200 percent. This shift happened quickly: One of the biggest predatory lenders, Enova International, made 98 percent of its revenue in 2009 from payday loans, but in 2019 only 10 percent came from payday loans compared to 43 percent from installment loans. Although the interest rates are slightly lower than payday loans, and consumers have longer to repay them, installment loans are actually more likely to trap people in dangerous debt cycles because they target the same low-income people but require a much bigger principal to be paid back.

There has been bipartisan legislation to curtail both types of predatory lending. Congress enacted the Military Lending Act in 2006 and expanded it in 2015 to protect service members — 44 percent of whom received a payday loan in 2017, compared to 7 percent of the total population. The bill capped rates on most consumer loans at 36 percent APR for active duty members, their spouses, and their dependents. Meanwhile, 18 states and DC, red and blue alike, have strong rate caps on payday loans that are extremely popular. (Illinois’s House of Representatives actually approved their payday rate cap unanimously, and Nebraska passed theirs with 83 percent ballot approval.) In addition, the vast majority of states have rate caps on at least some installment loans. Forty-five states and D.C. set interest for $500 6-month loans at a median APR of 38.5 percent; 42 states and D.C. set interest caps on $2,000 2-year loans at a median APR of 32 percent.

Predatory lenders want to circumvent these state laws to charge obscene interest rates on Americans everywhere, and the Trump administration was more than happy to draft a new rule that makes that possible. The rent-a-bank rule works as follows: The consumer applies for a loan with the non-bank “fake lender” like Ace Cash Express or OppLoans, which processes that application and sends it to an actual bank. The bank sends money to the consumer and then sells the loan back to the fake lender in exchange for some of the profit. Finally, the consumer pays back their loan to the non-bank lender. The consumer only ever interacts with the “fake lender,” but since the bank technically originated the loan and isn’t subject to the same state interest rate restrictions as non-bank lenders, the fake lender doesn’t have to abide by the rate cap anymore either.

Predatory lenders have been trying to use this rent-a-bank scheme to evade fake lender and anti-usury laws as far back as the early 1800s, but courts and federal regulators have always found it to be illegal. Until the Trump administration reversed course and implemented the new rent-a-bank rule. Now, 42 states and DC currently have at least one predatory lender using a rent-a-bank scheme, and another five have high-cost installment lenders that lend directly to consumers.

A $2,000 2-year installment loan would cost $7,960 in fees.

The costs of this rule to individual people and families will be enormous. In a state like Iowa, where rates are capped at 36 percent for both $500 6-month loans and $2,000 2-year loans, a $500 6-month installment loan from Check ‘N Go that a borrower is able to fully pay after the first term would cost $90 in fees at the 36 percent APR.  But under the new rule, Check ‘N Go is able to charge 199 percent APR on the same loan, which would cost $497.50 just in fees. Similarly, a $2,000 2-year installment loan repaid after just one term would cost $1,440 in fees at a 36 percent APR but $7,960 in fees at 199 percent APR.

And this example is assuming that borrowers are able to pay off the loans when they’re due, instead of renewing them, which is much more common. After six renewals, that 2-year installment loan at a 199 percent APR will cost $47,760 in fees.

This isn’t just a hypothetical exercise. About 19 percent of the 53 million adults in the US with household incomes under $40,000 will take out a payday loan sometime during the year, and most will end up renewing so many times that they pay more in fees than the principal they originally borrowed. If that percent holds across the states, as many as 4 million adults every year will take out a payday loan in a state where anti-predatory lending laws are being undermined by the rent-a-bank rule.

To add insult to injury, while these non-bank lenders profit by preying on millions of desperate Americans, they’re also demanding special support from the government during the pandemic. When the Paycheck Protection Program (PPP) was created in March 2020 as part of the CARES Act, payday lenders and their ilk were initially excluded. The lenders threw a tantrum, suing the government for inclusion and convincing a number of lawmakers from both parties — who happen to have received 6 times more in campaign contributions from the payday industry than those not involved — to write a letter urging the Trump administration to provide them with PPP funds, which it ultimately did.

At least 35 payday loan and debt collection companies received between $9 billion and $23 billion in PPP loans

As of July 2020, at least 35 payday loan and debt collection companies and their subsidiaries had received between $9 billion and $23 billion in PPP loans. Meanwhile, they continued to charge low-income consumers 400 percent APR on short-term loans amidst a financial crisis. Some even had the audacity to market “COVID-19 Financial Relief” and “Emergency Funding Relief” loans at 800 percent APR early in the recession. One company, Opportunity Financial — which operated under the name OppLoans but recently rebranded as OppFi — lends directly in 10 states and uses a rent-a-bank scheme in 33 other states to lend at 160 percent APR. OppFi has received 46 complaints to the Consumer Financial Protection Bureau (CFPB) for their payday lending practices since 2011 and is currently being investigated for potentially violating the Military Lending Act, but last year they took a PPP loan of $6,354,000. Another predatory lender, CashCall, has received a staggering 565 complaints to the CFPB and was successfully sued in separate cases by the CFPB and DC for using a rent-a-bank scheme to charge illegally high interest rates, but still received a PPP loan of $788,600.

The good news is that there are some easy fixes to this problem. In an ideal world, we would have a national 36 percent rate cap that applies to everyone. At 36 percent APR, consumer loans would still be pretty costly but wouldn’t be at predatory usury levels. The bipartisan Veterans and Consumers Fair Credit Act introduced by Representatives Jesús “Chuy” Garcia (D-IL) and Glenn Grothman (R-WI) in November of 2019, and which is expected to be reintroduced this legislative session, would extend the Military Lending Act’s 36 percent cap to all consumers. This would be overwhelmingly popular with the American public, polling at 70 percent among all voters with no less than 60 percent support in any state and with a majority of those opposed saying that 36 percent is still too high. However, given the makeup of the Senate, this legislation is unlikely to pass, and certainly not quickly.

Waiting for a new comptroller of the currency to be appointed by President Biden and then issue a new rule reversing the rent-a-bank rule will also take some time and could face a threat from lawsuits in a very conservative federal judiciary. In the meantime, millions of low-income consumers will be robbed of billions of dollars in fees from exploitative interest rates.

The much faster and easier solution to the rent-a-bank problem is for Congress to simply use the Congressional Review Act (CRA) to overturn the rule. This option is time-limited, though; Congress has just 60 legislative days after a rule is implemented to pass CRA legislation. Thankfully, Representative Garcia (D-IL) and Senator Chris Van Hollen (D-MD) and Senator Sherrod Brown (D-OH) took the first step on Thursday March 25 and introduced the necessary CRA legislation to repeal the rent-a-bank rule.

The resolution now needs to pass both the House and Senate and get signed by President Biden soon, likely sometime in May, to prevent millions of low-income people every year from being even further exploited and trapped in debt by predatory lenders.

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