Congress on Thursday overturned a set of regulations enacted in the final days of the Trump administration that effectively allowed payday lenders to avoid state laws capping interest rates.
The House voted 218-208 to overturn the Office of the Comptroller of the Currency's payday lending regulations, with one Republican voting with Democrats.
Thursday's vote to overturn the OCC's “true lender rules” marked the first time Democrats in Congress successfully overturned regulations using the Congressional Review Act.
The act was enacted in the mid 1990s and gives Congress the authority to overrule federal agency rules and regulations with a simple majority vote in the House and Senate. Its powers are limited to a certain period after an agency finalizes its regulations, usually around 60 legislative days.
The Senate had voted to overturn the OCC rules on May 11, in a vote of 52-47. The bill now goes to President Joe Biden, who is expected to sign it.
By overturning the Trump administration rule enacted in late 2020, Democrats aimed to stem a payday lender practice that critics had dubbed a “rent-a-bank” scheme.
While payday lenders are regulated at the state level, the payday lender would partner with a bank with a national banking charter when making high-cost installment loans. Because a national bank is not based in any one state, it is not subject to individual state usury laws.
“State interest rate limits are the simplest way to stop predatory lending, and the OCC's rules would have completely bypassed them,” said Lauren Saunders, associate director at the National Consumer Law Center, a consumer advocacy group.
This isn’t the first time that “rent-a-bank” has been an issue. Federal regulators clamped down on the practice in the 1990s, but with the proliferation of online banking and fintech companies specializing in online-only financial services, the practice is growing once again.
An example on how the practice works can be seen in Elevate, a Texas-based fintech company that offers high-cost installment loans like a payday loan. Elevate offers loans in several states, including Arizona, which has a state law capping interest rates on payday loans at 36%. Because Elevate uses banks out of Utah and Kentucky to originate those loans, Elevate is able to make loans in Arizona for as high as 149%. In other states, Elevate makes loans with annual interest rates as high as 299%.
In a statement, Biden's appointee to the Comptroller of the Currency said he would “respect” Congress overturning their regulations.
“I want to reaffirm the agency’s long-standing position that predatory lending has no place in the federal banking system,” acting Comptroller of the Currency Michael J. Hsu said in a statement.
While Thursday's vote marked a first for Democrats, former President Donald Trump and a Republican-controlled Congress used the Congressional Review Act when they came to power in 2017, overturning 15 rules and regulations enacted in the waning days of the Obama administration.
Before Trump, the law was used only once, in 2001, when Republicans in Congress voted to repeal a set of ergonomic regulations enacted in the final day of the Clinton administration.