- Key Insight: A newly passed bill in Oregon will block out-of-state lenders from evading its cap on interest rates.
- Forward Look: Oregon is only the latest in a growing list of states to pass such laws, and more may follow suit.
- Expert Quote: "There is a loophole that continues to exist, and Oregon is shutting the door on that," said Ellen Harnick, director of state policy at the Center for Responsible Lending.
For decades, an obscure federal law opened a crack in states' interest rate caps. Now a growing list of states are sealing it off.
The latest example is Oregon. On March 5, the Oregon Senate passed House Bill 4116, which reinforces the state's 36% limit on consumer loan interest rates, following the bill's passage in the House. Previously, out-of-state lenders were able to use a provision of the 1980 Federal Depository Institutions Deregulation and Monetary Control Act to evade that cap, charging Oregonians far more.
Now, as soon as Oregon Gov. Tina Kotek signs the new bill, that workaround will come to an end.
"There is a loophole that continues to exist, and Oregon is shutting the door on that," Ellen Harnick, director of state policy at the nonprofit Center for Responsible Lending, told American Banker.
In recent years, consumer advocacy groups say, online lenders have exploited the loophole through a practice that critics call "rent-a-bank." By partnering with banks based in states with higher caps on interest rates — or no cap at all — fintechs and other digital businesses could charge annual percentage rates far beyond the local limit.
"We're talking about loans with APRs well over 100%, and they're doing it because they found a way to evade Oregon law by making an arrangement with a bank charter in Utah," Harnick said.
Technically, what the new legislation does is opt Oregon out of the 46-year-old federal law. That law explicitly gave state-chartered banks the ability to get around local interest rate caps, but also gave the states the right to exempt themselves from this provision.
By passing HB 4116, Oregon joins Colorado, Iowa and Puerto Rico in claiming its right to opt out. Other states may follow.
Not all Oregon lenders opposed the legislation. Scott Bruun, president of the Oregon Bankers Association, said his organization was "neutral" on HB 4116.
"None of our member banks are directly affected, and banks operating in Oregon have long complied with state law limiting consumer lending rates to 36% annually," Bruun said. "We will continue to monitor the bill's implementation to ensure it is carried out clearly and without unintended consequences for Oregon's consumer lending marketplace."
Fintechs, on the other hand, were far from neutral. Phil Goldfeder, CEO of the American Fintech Council, said he was "very, very disappointed to see the legislature move in this direction," and complained that the bill's passage was rushed.
"Moving a complex financial services bill like this in a short session does a tremendous disservice to Oregon banks and families," Goldfeder told American Banker.
Goldfeder argued that the new law, if signed, will hamstring state-chartered banks trying to collaborate with fintechs on innovative new products, and at the same time do nothing to constrain banks with national charters.
"All this does is put handcuffs on community banks, while allowing nationally chartered banks to continue lending at whatever rates they choose," he said.
The fight over the Oregon legislation is not over, Goldfeder said. The American Fintech Council has called a meeting with its members to explore all options, he said, including potential legal actions.
The fintech trade group has taken this route before. After Colorado passed its opt-out law in 2023, Goldfeder's organization — along with the American Financial Services Association and the National Association of Industrial Bankers —
At the time, Goldfeder complained that the ruling would "only perpetuate a patchwork of state regulations that limits access to affordable, innovative credit products."
Harnick was unimpressed by that argument. The United States, she said, is inherently a patchwork of federal and state laws, thanks to its constitutional structure.
"There's a patchwork, if you want to call it that, of state laws on every single subject … and there's good reason for it," Harnick said. "There's not a lot of good reason to give one class of Silicon Valley- or private equity-driven lenders an exemption."
