Consumer finance

Congress ends Trump-Era rule allowing payday lenders to avoid interest rate caps

Congress voted Thursday to overturn a Trump administration rule that allowed high-interest consumer lenders to tie up to banks and bypass state-level interest rate caps.

The Office of the Comptroller of the Currency decision in late October stated that any bank or federal savings association that signs loan documents should be considered the “real lender,” even if the loan is managed or sold to a bank. high interest entity such as as a payday lender. Before this rule, the courts had sometimes ruled these arrangements illegal. Under then-President Donald Trump, the OCC had cited different approaches from the courts to justify drafting the rule.

Because the rule was finalized so close to the end of Mr. Trump’s term, Congress was able to revoke it by a simple majority vote in every Democratic-led chamber under the Congressional Review Act. The Senate approved the repeal of the true lender rule last month by a 52-47 vote; the House followed Thursday with a vote 218-208.

The Biden administration has said it supports the repeal; it takes effect upon signature by the president.

“As we expect President Biden to sign the resolution, I want to reaffirm the agency’s long-standing position that predatory lending has no place in the federal banking system,” the Acting Comptroller said. of the Michael Hsu coin in a press release.

Consumer advocates feared the OCC rule could lead to an explosion of arrangements between banks and lenders that allow payday lenders to avoid laws in 45 states and the District of Columbia limiting the amount of interest lenders have non-bank can charge.

The rule came into effect at the end of December and a bank has already cited it as a defense in a court case.

New York City restaurant owners Markisha and Carlos Swepson are fighting a foreclosure after defaulting on business loans from Axos Bank of Nevada with an effective annual interest rate of 268%. The loans are managed by the New Jersey-based payday company, World Business Lenders.

The Swepsons are pursuing a class action lawsuit against World Business Lenders and Axos Bank, and the lockdown has been suspended because the case is pending arbitration, according to Swepsons attorney Shane Heskin.

In a letter to the court in November, Axos dismissed the restaurateurs’ claim that the loan was part of an inappropriate bank rental partnership and added “as the Office of the Comptroller of the Currency recently made clear, even such arrangements are appropriate.

“There is no doubt in my mind that this rule is a weapon that will be difficult for consumers to master when fighting these predatory situations,” Heskin said in an interview.

Representatives of Axos and World Business Lenders could not be reached for comment.

The Consumer Federation of America staged opposition to the Trump administration’s rule and urged Congress to overturn it. Several state attorneys general are also suing him. The pro-repeal coalition included three of the largest credit unions, state bank supervisors and faith groups and veterans.

“This is a damaging rule that allows lenders to circumvent consumer protection laws like interest rate caps simply by putting a bank’s name on their documents,” said representative Jesús. “Chuy” García (D., Ill.) In an interview. “It just encourages playing games.”

Payday lenders and other high-interest loan companies, whose lobbying reports show they spent more than $ 700,000 in the first three months of the year, have teamed up with banking associations and the United States Chamber of Commerce to fight against the repeal of the rule by Congress.

“Particularly in times of financial difficulty, we are confident that consumers have more financial options, not less, and that they will continue to choose and appreciate low dollar nonbank lending solutions because they are simple. , reliable and convenient, ”said Ed D ‘Alessio, executive director of a financial services organization called INFiN. The trade association represents 350 member companies operating approximately 8,000 locations across the country and online.

Supporters also said other rules prevent consumer lenders from using banks to bypass state interest rate caps and that such deals can be monitored by the OCC and others. financial regulators.

“The rule clarifies that as a true lender, the bank retains the compliance obligations associated with the granting of the loan, even if the loan is subsequently sold,” said Brian Brooks, Acting Currency Controller when the rule was released. was promulgated during a Senate banking committee. hearing on the issue in April.

Senator Elizabeth Warren (D., Mass.) Said banks are rarely penalized by OCC or other financial supervisory agencies, which she says have a poor enforcement record.

The OCC did not respond to Ms. Warren’s criticism.

Write to Julie Bykowicz at [email protected]

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