The US House of Representatives last week joined the Senate in voting to overturn a federal regulation that allowed payday and other small-dollar and short-term lenders to skirt limits on what interest rates they could charge for loans. This is a major victory for low-income borrowers.
The rule, “National Banks and Federal Savings Associations as Lenders,” was enacted in the final months of former President Donald Trump’s administration by the Office of the Comptroller of the Currency (OCC). It made a simple tweak in regulatory language that would have had profound consequences for millions of people in the United States by exempting lenders from regulations on interest rates for loans to the most vulnerable.
Nearly one-third of people in the US do not have enough savings to cover an unexpected cost of four hundred dollars. For them, paying for an unexpected expense, like auto repairs or a medical emergency, requires a loan. Approximately 12 million people take out payday loans – quickly accessible, small-dollar loans that rely on pledged checks dated for the next payday as collateral – each year, and there are more than 16,000 payday lender locations across the country, mostly in low-income neighborhoods and marginalized communities.
Unfortunately for many people who need these loans, the triple-digit interest rates that can accompany them can lead to a debt trap, where people continuously roll over and refinance loans, incurring more fees and more debt.
By changing the definition of what qualified as “bank loans,” which are largely exempt from state-based interest rate caps, the OCC rule resuscitated “rent-a-bank” schemes, in which non-bank lenders, like payday or auto-title lenders, partner with an OCC-regulated bank to bypass interest rate limits under state laws.
In April, Human Rights Watch wrote a letter to Congress, urging both chambers to use the Congressional Review Act to close this loophole for predatory lenders and help prevent people from falling into debt they can never repay. With last week’s House vote, Congress did just that. The OCC rule has been repealed, but both Congress and the administration of President Joe Biden have more to do to protect the rights of low-income borrowers.