Dear Congress: Do away with the rent-a-bank ruse

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The current push by payday lenders to try and outflank state laws is but one reason Congress needs to act on a new proposal that would cap interest rates at 36%.

Modern payday lenders — offering the high-interest credit that has been called today’s loan sharking and that started in the 1990s — are finding ways to circumvent state laws that prohibit or restrict exorbitant interest rates, sometimes rates outstripping 500%.

Payday lender contrivances take many forms, but one particular device merits attention because it’s spreading.

It’s called rent-a-bank, or charter renting. Federal laws on banks, which take deposits, subject them only to the usury law of the state in which the bank is based. But the bank can ignore the interest rate limit that another state may enact.

Meaning, it can “export” the interest rate limit of its home state and apply it to any loan made to a consumer located in another state. That is why many credit cards are issued by banks located in states, such as Delaware and Nevada, which have no usury limits.

Under the rent-a-bank model, the nonbank payday lender partners with a bank. It then claims that the bank actually makes the payday loan, and the (nonbank) payday lender merely acts as the bank’s agent. Because of this, the payday lender claims the loan is not subject to any state usury law that may prohibit payday lending.

Currently, some 90 million Americans live in states — such as Georgia, New York, Arkansas, Colorado and West Virginia — that restrict payday lending, typically with an interest rate cap at 36% or less. But even these consumers can fall prey to payday lenders that employ artifices, such as rent-a-bank, to evade their states’ usury laws.

For example, West Virginia and Colorado have gone to great lengths to enforce their state laws against rent-a-bank and other payday lenders. But their work is a constant struggle, as the courts of yore pointed out.

Regardless of what happens in current litigation, such as Colorado’s, challenging rent-a-bankpayday lending, because there is no limit to human inventiveness, some payday lenders may create new technological devices through the guise of “innovation” to stay one step ahead of whatever the courts or state legislatures might prohibit. As a 1920s Kentucky court put it, “The cupidity of lenders" has "resulted in a great variety of devices to evade the usury laws.”

This is where Congress comes into play. Back in 2006, Congress passed the Military Lending Act that places a 36% cap on the interest rate for payday-type loans offered to military service members. This law also extends to rent-a-bank lenders.

A bipartisan duo in the House, Reps. Jesús G. "Chuy" García, D-Ill., and Glenn Grothman, R-Wis., recently introduced HR 5050 — the Veterans and Consumers Fair Credit Act — which would create a nationwide interest rate cap of 36%. It is up for committee consideration later this month. What is good for military service women and men should be good for everyone.

As lawmakers begin debating the rent-a-bank ploy this month, they should act swiftly to pass the Veterans and Consumers Fair Credit Act.

Although state consumer protection laws are good, they are subject to the constant gaming by lenders employing rent-a-bank and other schemes. Federal legislation would put an end to this, by offering financial protection covering all Americans.

This issue should not be a matter of right versus left. Instead, it is a question of right versus wrong.

It is wrong for Congress to allow avaricious payday lenders to prey on hardworking Americans. Just as the Military Lending Act protects those in uniform from the scourge of predatory payday lending, it should also protect everyone nationwide.

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Payday lending Small-dollar lending State regulators Law and regulation Compliance House Financial Services Committee