Interest rate limits in the United States are one of the oldest forms of consumer protection. These limits are called usury laws, and they’ve existed for centuries. At the time of the American Revolution, every state in the Union had interest rate limits.
That’s according to Lauren Saunders, Associate Director of the National Consumer Law Center, a nonprofit organization that advocates for consumer reform.
“But in the last few decades, banks have managed to escape interest rate limits,” Saunders says. “Banks generally can charge whatever they want, and they can ignore state law. So, predatory lenders have been trying to find a way to use banks to get around interest rate limits so they can charge high, astronomical rates that states don’t allow. We call this ‘rent-a-bank’ lending.”
“Rent-a-bank” schemes work like this: A payday lender will place a bank’s name on a loan. Because national banks have no limit on charging interest rates under the National Bank Act of 1864, that loan can have an interest rate higher than the state cap. The bank, which holds the loan, will then sell it back to the payday lender.
That means payday lenders can use banks as cover for charging exorbitant interest rates. And payday lenders can charge Interest rates that exceed what’s allowed by each state.
Since the 1800s, the Supreme Court has held that contracts concerning the interest rate on a loan won’t be upheld if they were formed with the intent to evade usury laws.
But, last September, two federal regulatory agencies argued in a Colorado federal court district that non-bank lenders, including payday lenders, may charge the same interest rate banks offer.
Those two regulatory agencies are the U.S. Treasury’s Office of the Comptroller of the Currency, or OCC, which regulates and supervises banks, and the Federal Deposit Insurance Corporation, FDIC, which regulates and insures credit unions.
Here’s Saunders again.
“The OCC and the FDIC have sided with this predatory lender, World Business Lenders, in a court case, and then they shortly afterwards issued this proposed rule that would codify the ability of lenders that should be limited by state interest rate limits to charge whatever banks can charge,” Saunders says.
Romulus Johnson is a counsel with the FDIC’s Legal Division. He says the new rule-making isn’t intended to prevent states from setting their own interest caps, but rather to make sure banks can sell their loans to maintain the liquidity of their assets.
“The sole purpose of that proposed rule-making was merely to reiterate that, in the FDIC’s view, community banks continue to enjoy the same right of interest rate exportation and assignment of their loans that national banks enjoy under the National Bank Act,” Romulus says.
Martin Gruenberg is a member of the FDIC’s Board of Directors. He voted against the rule-making proposal in November.
“It is essential that the FDIC not unnecessarily undermine the application of state consumer protection laws to rent-a-charter relationships. This proposed rule could well have that effect,” Gruenberg argues.
Yesterday, Wisconsin Attorney General Josh Kaul joined a bipartisan coalition of eighteen state attorneys general opposing the proposal to exempt payday lenders from state interest caps.
Wisconsin does not have a usury law that caps interest rates. But in a press release yesterday, Attorney General Kaul argued the importance of letting states impose and enforce interest rate caps in the future.