The Lewiston branch of Community Credit Union sits in the second-poorest census tract in Maine. On a daily basis we watch members of the Credit Union and the community struggle with situational and generational poverty. We watch our immigrant community challenged with navigating the financial system and building trust with financial institutions.
The last thing that our members need is predatory loans that make their economic situation worse.
The good news is that Maine has strong laws with interest rate limits that prevent predatory lending. The bad news is that some evasive lenders are finding ways around our laws — and a federal bank regulator rule passed late last year supports those evasions. Congress should seize on the chance to overturn that rule using the Congressional Review Act — but time is running out.
In a “rent-a-bank” scheme, a high-cost, non-bank lender finds a bank to play a nominal role and put its name on the loan agreement, claiming that the loan is a “bank loan” exempt from state interest rate limits (banks are generally exempt from state rate limits).
Rent-a-bank schemes first started in the early 2000s with storefront payday lenders. But state attorneys general, courts, and federal bank regulators shut them down. Relying on a centuries-old anti-evasion doctrine, courts looked beyond the bank’s name on the contract to the facts of who was operating and profiting from the loan program. That is, courts followed the money to find that the payday lender, not the bank, was the “true lender” and was subject to state law.
Today, a new wave of rent-a-bank evasion schemes are back, and already operating in Maine, but this time with high-cost installment loans that Maine does not allow. Non-bank lenders that should be charging no more than 30% APR on a $2,000 loan are charging 160% APR or more by lending the loan through an obscure bank outside of Maine. These loans may be offered online or on tablets at mechanics or even pet stores, where consumers may think they are getting a free installment payment plan.
We have seen that several members of Community Credit Union are paying these lenders hundreds of dollars, month after month, deepening their financial hardships.
Shockingly, a rule enacted late last year by the federal Office of the Comptroller of the Currency protects these arrangements and blocks courts from looking at the facts and the truth. The rule says that the “true lender” is determined only by the name in the fine print of the contract. That is, if an OCC-regulated bank is named as the lender on a 160% APR loan made to a Maine resident, then federal law preempts Maine laws that prohibit loans at that rate to our residents, even if the bank has little to do with the loan.
We have already seen obscure OCC-regulated banks facilitate these schemes for both consumer and small business loans. And the OCC rule has already been raised as a defense to justify a 268% APR loan of $67,000 to a restaurant owner in New York (where the legal rate is 25%) and to defend a 160% APR loan to a disabled veteran in California, where the legal rate is 36% plus the federal funds rate.
These non-bank lenders are operating on an uneven playing field, relying upon the benefits of OCC preemption to circumvent state consumer protections that other state-regulated lenders comply with, placing borrowers in harms’ way. These loans extract wealth and cause lasting damage to household financial security and on communities.
Sens. Collins and King and Reps. Pingree and Golden should support the resolution to overturn the OCC rule in order to prevent predatory lenders from evading Maine law. At a time when low-income consumers and small businesses can least afford it, the OCC rule is enabling destructive, high-cost lending and shortening the reach of COVID-relief efforts.
Jennifer Hogan is the president and CEO of Community Credit Union which has branches in Lewiston, Auburn and Turner.