The House has voted for the so-called Madden bill, which, if it becomes law, would spread predatory triple-digit loans, like a virus, to every state in America. The legislation, which faces an uncertain fate in the Senate, would ensnare borrowers in financially devastating debt traps.
The bill states that if a loan interest rate is valid at the moment of origination, then it remains valid when the loan is transferred. The bill would thus facilitate “rent-a-bank” schemes whereby nonbanks, such as payday, installment loan or credit card companies, form a superficial partnership with a bank in order to piggyback off bank preemption of state usury laws and charge triple-digit interest rates well in excess of state rate caps. At the same time, these nonbank entities are not bound by the regulatory regimes banks must abide by — they get to have their cake and eat it too.
The House bill and its companion in the Senate are sold as a fix to a federal court’s decision in Madden v. Midland, which reaffirmed the illegality of this type of transfer. Instead of fixing anything, these bills would break apart crucial state consumer protection laws.
In evaluating this measure, we should keep in mind something basic. Good loans serve as ladders of opportunity, helping borrowers reach their dreams. Predatory loans turn dreams into nightmares.
This holds true for brick-and-mortar lenders and for online loans. The latter is often referred to as part of the “fintech” sector. This phrase has been brandished like a magic wand that can transform a debt trap into a springboard for success — but fintech is not a magic wand.
Consider the experiences of a trio of California businessmen: Mark Newman borrowed money for his wine-importing business, Che Al-Barri for his cleaning company and Jason Berry for his auto repair shop. All received high-interest online loans and were subsequently sucked into a financial quicksand of debt.
This House bill would spread these harmful loans to states with strong interest rate caps by overriding state laws. Fifteen states plus the District of Columbia have laws capping short-term loan APRs at 36% or lower, which saves their residents more than $2.2 billion in fees that would have gone to payday lenders. Studies show these Americans are happy to be free of payday lenders. In Montana in 2010 and South Dakota in 2016, more than 70% of voters supported these interest rate caps — just the latest evidence of their popularity across the political spectrum. The legislation lawmakers are expected to consider this week would override the democratic will of these states, home to more than 90 million Americans.
To reiterate, though, this bill presents more than just a "payday problem" and would ensnare borrowers in debt traps caused by short- and long-term loans. For instance, some online lenders that offer long-term installment loans, of a year or longer, can profit even when a huge portion of borrowers default because they charge interest rates nearing or far above 100% APR. Even given current prohibitions, a few high-cost online lenders use "rent-a-bank" arrangements to try to reach new markets and circumvent usury laws around the country. State attorneys general of both political parties have acted to stamp out these types of schemes, but by legitimizing "loan laundering" the House bill being considered would make it far tougher for them to do so.
Far from merely reversing a recent court decision, this bill would dramatically broaden the scope of federal preemption of state law. This runs counter to the 2010 Wall Street Reform Act — which made clear that preemption does not apply to the subsidiaries of national banks. Rent-a-bank schemes are even less connected to actions of the bank itself than the activities of bank subsidiaries.
Instead of again becoming hypnotized by those who claim the mantle of financial innovation or by campaign donors, lawmakers should remain clear-eyed and work toward the well-being of consumers.
Even if they’re dressed up in an “app” or on a stylish website, the fact remains that high-interest predatory loans trap borrowers in a cycle of debt. They increase the likelihood of delinquency on other bills, involuntary bank account closures, delayed medical care and bankruptcy.