North Carolina’s ban on payday lending could be upended by a bill being pushed by a powerful congressman from the state, consumer protection advocates warned before it passed the House on Wednesday.
But Rep. Patrick McHenry, a Republican member of House leadership from Denver, North Carolina, said the Protecting Consumers’ Access to Credit Act is not what its critics contend and is designed to help Americans with poor credit.
The bill requires that an interest rate remain unchanged even if the loan is sold.
It’s a response to a 2015 decision by the 2nd U.S. Circuit Court of Appeals. The court held that when lenders that are not banks buy a loan, they – unlike a federally chartered bank – are subject to the interest limits in the borrower’s state. A federally chartered bank can charge interest under the laws of its home state, a crucial distinction since all 50 states have different laws.
North Carolina is among 18 states, along with the District of Columbia, that have capped interest rates on short-term loans.
The Center for Responsible Lending contends the bill would open the door to “rent-a-bank” schemes, in which short-term lenders use a national bank’s charter to circumvent state law. The center points out that similar methods are now used to get around state usury laws, according to several reports.
“This actually has happened in North Carolina before. We know it is possible. We know that payday lenders will try to evade our very strong state interest rate cap exactly because this happened before,” said Kelly Tornow, the director of North Carolina policy for the Center for Responsible Lending.
North Carolina has made changes to its law to stop the practice, Tornow said. A 2007 study by UNC found that “the absence of storefront payday lending has not made a significant impact on credit availability in North Carolina.”
“The sole purpose of this bill is to enable nonbank lenders to use bank partnerships to override state interest rate limits,” opponents wrote in a letter to Congress in September.
McHenry said those criticisms are “completely bogus objections” and that there are ways, outside of the bill, to “ensure consumer protection” when dealing with federally chartered banks.
The bill “says that we return to the banking precedent that ruled the day for 180 years that is now the basis for the partnership model in fintech (financial technology),” McHenry said. “It’s really important for the availability of credit.”
Fintech companies, which provide financial services by making use of software and modern technology, often work with banks to offer loans to under-served consumers. The company Kabbage offers small-money loans to newer small businesses through an automated lending platform. Though it is not directly impacted by the Madden decision, co-founder Kathryn Petralia has been keeping tabs on the legislation and its potential impacts.
“It doesn’t actually do anything about payday lending, but that’s the narrative,” Petralia said.
“We go back to long-standing precedent on a product being ‘valid when made’ even when resold,” said McHenry, a member of the House Financial Services Committee.
The 2nd Circuit covers New York, Connecticut and Vermont. A 2016 study found that the ruling dramatically reduced the availability of loans for borrowers with low credit scores (below 644) in those states. Thirty percent of Americans had a credit score of 650 or lower in April 2017, according to FICO.com.
“That’s no reason to give people terrible loans,” said Scott Astrada, the Center for Responsible Lending’s director of federal advocacy. “What kind of loans are you opening up to this population?”
The Center for Responsible Lending, founded in North Carolina, is leading a collection of more than 150 consumer protection and civil rights organizations from across the country to fight the bill, saying it would open the door to payday lending even in states that have laws against it. The North Carolina Consumer Finance Act outlawed payday lending or short-term cash advances in 2001.
About 12 million Americans use payday loans each year, according to Pew, spending $520 in fees on loans of $375.
“While there are many good actors that have relied on this (valid when made) doctrine, if it were to be codified ... state laws protecting against usury would largely become meaningless,” said Rep. Maxine Waters, a California Democrat. “Payday lenders could contract with a bank to originate loans that would otherwise be usurious in a given state.”
This bill, which passed the House 245-171 on Wednesday evening, faces uncertain prospects in the Senate. Sen. Mark Warner, a Virginia Democrat, sponsored the legislation in the Senate but he has backed away from the bill citing concerns about the potential for payday lending.
“This is not an ideological bill. This is a bill about ensuring financial products are able to continue going forward,” McHenry said. “This should not be a partisan issue nor should it be an ideological issue.”
McHenry, the Republicans’ chief deputy whip who is often mentioned as a potential future candidate for speaker of the House, has received more than $1 million in campaign contributions from the securities and investment industry and another $813,000 from the commercial banking industry since 2006. For his 2018 election, McHenry has already raised more than $384,000 from those two sectors, according to the Center for Responsive Politics.
Warner has received more than $1.3 million from the securities and investment industry since 2013, according to the Center for Responsive Politics.