The controversy surrounding Mark Warner’s payday loan bill, explained

Payday loans aren’t something you think a great Democratic politician would want to nurture. But Senator Mark Warner (D-Va.) Got into hot water because of a bill that critics said would do just that.

Payday lenders and their ilk have recently come under increased scrutiny for offering poor Americans small, short-term loans with catastrophically high interest rates. According to at Pew Charitable Trusts, 12 million Americans use payday loans each year, for an average of $ 520 in fees just to borrow $ 375.

Talk with The week, Warner’s office insisted the senator is not motivated by great concern for payday lenders. Instead, a spokesperson claimed that Warner’s benevolent title Consumer Access to Credit Protection Act attempts to “restore a long-standing legal precedent and encourage access to credit for low- and middle-income Americans” by solving a patchwork regulatory problem.

But like most things to do with finance, the details are complicated.

What is at issue are the different ways in which states try to manage payday lenders. Some states are trying to crack down on them with caps on interest rates. But other states are more lenient. And the situation is further complicated by the large national banks, which operate under federal law and only have to comply with the interest rate caps of the state in which they are licensed.

This loophole allows national banks to engage in “rent-a-charter” programs. Since these banks are not subject to an interest rate cap (or are subject to a more lenient cap), they can issue a predatory loan and then immediately sell that loan to a smaller payday lender prohibited by the law. state law to issue it itself. .

A 2015 case in the Second Circuit, Madden v. Midland, has put the kibosh on this practice under its jurisdiction. But by deciding that the state law governing the owner of the loan has the final say, it upended a long-held legal concept called “valid when granted” – which says, roughly speaking, that if the terms of a loan are acceptable in the jurisdiction where it is created, they remain acceptable even if the ownership of the loan is transferred to another party.

This is where Warner comes in. The senator’s bill would essentially enshrine “valid when done” as national law, “notwithstanding any state law to the contrary.” “

Why do that?

His office pointed out that there may be many mundane business reasons for banks to sell a loan to another party. But giving the final say to the state’s loan terms law throws that secondary market into uncertainty and makes it harder for banks to tailor loans to all types of Americans, rich and poor. When banks’ freedom to diversify is limited, the fear is that banks may have to offer low-income Americans less credit or higher interest rates because they cannot make money by charging rates. higher interest on loans to wealthier Americans. Warner’s office reported a to study which concluded that the Madden ruling resulted in a decline in the supply of credit available to low-income Americans in the Second Circuit states.

Critics object that whatever its intent, the bill will give “rental” programs more room to flourish.

“This bill could open the floodgates for a wide range of predatory actors to grant loans at an annual interest rate of 300% or more,” wrote the Center for Responsible Lending in a letter protesting the bill – and co-signed by 151 other national and state organizations. “In about 34 states, a loan of $ 2,000, a 2-year installment loan at an APR above 36% would be illegal. This bill risks making high-cost loans allowed nationwide.”

State law interest rate caps are “the simplest and most effective method of protecting consumers from the predatory loan debt trap,” the letter continued. If Warner’s bill passes, this tool becomes fundamentally useless. And the only way to fight predatory interest rates will be a national cap. The letter also states that although Madden led to a decrease in credit to struggling Americans, the amount of loans extended to this population was initially low.

In an interview with The Week, Warner’s office agreed that “hire hire” programs were a serious problem. But they believe the problem is best addressed by regulators like the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Consumer Financial Protection Bureau, which are responsible for monitoring loan sales and originator relationships. of loans and buyers directly. And they see their bill as a tailor-made effort to streamline the lending market, in the hopes of giving more low-income Americans access to credit.

This argument is certainly not crazy. But there is always the practical question of how much such agencies can realistically do. That civil rights groups like the NAACP argue that state law interest rate caps are too valuable a tool to lose should give everyone pause.

It’s also worth noting that Warner has a reputation for being comfortable with payday lenders. As governor of Virginia, he sign a 2002 bill that critics said opened up the state to the breakdown industry, and only called for more regulations years later. Globally, it is far from being the Senate’s largest recipient of donations from payday lenders, but in 2014, when he was re-elected to the Senate, he received more industry money than any other Democratic senator that year.

As for the argument that Warner’s bill could actually help low-income Americans, it’s… plausible. But a better alternative, without all of these perverse side effects, would be to directly tackle the precarious finances of low-income Americans with a public, not-for-profit option for small loans and banking services. The idea of ​​having the US Postal Service just do that To got some traction recently.

I don’t believe Warner is trying to attract the poor. But his bill is a good example of how Democrats’ preference for pro-market incrementalism has reached the point of declining returns.

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