Bill to remedy Madden ruling would be a nightmare for consumers
A vote is imminently awaited in the House on the so-called Madden Bill, which, if it becomes law, would spread predatory triple-digit loans, like a virus, to every state in the United States. The legislation would drag borrowers into financially devastating debt traps.
The bill states that if an interest rate on a loan is valid at the time of origination, it remains so when the loan is transferred. The bill would thus facilitate “rent-a-bank” programs whereby non-banks, such as payday loan, installment loan or credit card companies, form a superficial partnership with a bank in order to to be grafted onto the bank pre-emption of state usury laws and to charge triple-digit rates. interest rates well above state rate ceilings. At the same time, these non-bank entities are not bound by the regulatory regimes that banks must comply with – they too can have their cake and eat it.
The House Bill and its companion in the Senate are being sold as a fix to a Federal court decision in Madden v. Midland, who reaffirmed the illegality of this type of transfer. Instead of fixing anything, these bills would break crucial states’ consumer protection laws.
In evaluating this measure, we must keep something fundamental in mind. Good loans serve as ladders of opportunity, helping borrowers achieve their dreams. Predatory loans turn dreams into nightmares.
This is true for physical lenders and for online loans. The latter is often referred to as part of the “fintech” sector. This phrase has been wielded like a magic wand that can turn a debt trap into a stepping stone to success – but fintech is not a magic wand.
Consider the experiences of a trio of Californian businessmen: Marc Newman borrowed money for his wine import business, Che Al-Barri for his cleaning business and Jason berry for his auto repair shop. All of them received high interest online loans and then were dragged into a quicksand of financial debt.
This House bill would extend these damaging loans to states with high interest rate caps by overriding state laws. Fifteen states plus the District of Columbia have laws capping short-term loan APRs at 36% or less, saving residents more than $ 2.2 billion in fees that would have gone to payday lenders. Studies spectacle these Americans are happy to be released from payday lenders. In Montana in 2010 and South Dakota in 2016, more than 70% of voters supported these interest rate caps, just the latest proof of their popularity across the political spectrum. Legislation that lawmakers are expected to consider this week would override the democratic will of those states, which are home to more than 90 million Americans.
To reiterate, however, this bill presents more than just a “payday problem” and would drag borrowers into the debt traps caused by short and long term loans. For example, some online lenders who offer long-term installment loans, one year or more, may benefit even when a large portion of borrowers default because they charge close or close interest rates. well above 100% APR. Even with the current bans, a few high-cost online lenders are using “rent-a-bank” deals to try to reach new markets and circumvent usury laws across the country. The attorneys general of the two political parties acted to eradicate this type of stratagems, but legitimizing “loan laundering“The House bill under consideration would make it much more difficult for them.
Far from simply overturning a recent court decision, this bill would greatly expand the scope of federal preemption of state law. This flies in the face of the Wall Street Reform Act of 2010 – which made it clear that preemption does not apply to branches of domestic banks. Rent-a-bank programs are even less tied to the actions of the bank itself than to the activities of subsidiary banks.
Instead of being hypnotized again by those who claim the mantle of financial innovation or by campaign donors, legislators must remain lucid and work for the well-being of consumers.
Even if they dress up in an “app” or a fancy website, the fact remains that predatory high-interest loans trap borrowers in a cycle of debt. They increase the likelihood of unpaid bills on other bills, unintentional bank account closings, medical delays and bankruptcy.
Congress should reject legislation that would spread predatory lending and turn the dreams of many American families into nightmares.