Congress repeal highlights issues with subprime bank lending partnerships


Following action by bipartisan majorities in the House and Senate, President Joe Biden enacted a measure on June 30 that repeals the “real lender” rule, which the Office of the Comptroller of the Currency (OCC) has finalized in October. Proponents of the rule had argued that it would stimulate competition and expand access to credit, but in fact it allowed payday lenders to issue loans with bank sponsors who often had higher and lower prices. protections than those already available under state laws.

The rule was overturned with the help of the Congressional Review Act, which gives lawmakers the ability to override recently passed regulations. The House voted 218-210 to repeal the rule on June 24, and the Senate voted 52-47 on May 11.

The rule sanctioned partnerships in which federally chartered banks would initiate loans on behalf of high-cost lenders to customers who had no other relationship with the banks; such loans would otherwise be prohibited by state laws. The loans could then be quickly sold to non-bank lenders. These partnerships are known as “rent-a-bank” or “rent-a-charter”.

The rule stated that the bank should always be seen as the true lender, essentially protecting partnerships from legal and regulatory scrutiny, even when they were only used to circumvent state laws. But this approach presents a serious risk for borrowers and the banking system.

When the OCC proposed its “real lender” rule last summer, Pew warned that this could lead to the resurgence of bank leasing practices, which could facilitate high-risk lending and undermine progress in efforts to create safer alternatives. to high cost payday loans.

The votes show that lawmakers share these concerns. Additionally, on the day of the Senate action, the White House released A declaration supporting the repeal, saying the rule “undermines state consumer protection laws and would allow the proliferation of predatory lending by unregulated payday lenders using, among other vehicles,” rent-a- bank ”to channel predatory high-interest loans through national banks to evade state interest rate caps.

The repeal is a big step forward. Now, banking regulators must act to curtail other bank lease agreements, most of which involve institutions overseen by the Federal Deposit Insurance Corp. (FDIC), and not by the OCC. Despite the banks’ limited knowledge of borrowers, limited underwriting, and onerous loan terms, the FDIC has not put a stop to these dangerous loans.

In at least seven states (Colorado, Maine, New Mexico, Ohio, Oregon, Virginia, and Washington), bank loans cost borrowers more than loans issued by state-approved payday lenders. In these cases, partnerships increase the cost of credit for vulnerable consumers who typically have no ongoing relationship with the bank that issued the loan.

Although proponents of these deals argue that they improve access to credit, a much better and less risky path to secure credit for small dollars is available, unaffected by the repeal of the true lender rule. Joint FDIC, OCC, Federal Reserve, and National Credit Union Administration guidelines released in May 2020 gave banks the regulatory clarity needed to provide their customers with safe and affordable loans or lines of credit. in small installments that are subject to federal oversight.

Regulators also said banks could use third-party expertise and technology to make these loans profitable. For example, a non-bank partner can provide the technology to increase the speed and reduce the cost of taking out and providing loans to customers of a bank checking account. Federal regulators must ban bank leasing partnerships immediately and in a way that promotes better bank lending, with help from technology vendors if needed.

Two of the five largest banks in the country, American Bank and Bank of America, are already offering small-installment loans on target for 2020, and momentum is building for more banks to follow suit. Federal regulators can foster this type of innovation by continuing to encourage banks to make safe, small payment loans available to their customers.

If banks were to choose to have a more direct impact by providing safe and affordable loans to their checking account customers, they would have many advantages over non-bank lenders that would help them offer loans at much lower prices. of these competitors. They have existing relationships with their clients; have no customer acquisition cost; can spread overhead over a full range of products; can borrow money at much lower rates than payday lenders; can use clients’ cash flows to automate an assessment of their repayment capacity; and can only deduct payments when the balance is sufficient.

Because each of the 12 million Americans who use payday loans each year have a checking account, consumers could save billions of dollars a year and be protected by federal banking system regulations if banks choose to serve these customers. instead of handing them over to payday lenders. .

Nick Bourke is the Director and Alex Horowitz is a Senior Research Officer for The Pew Charitable Trusts Consumer Credit Project.


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