Two measures have been introduced in Congress that would help payday lenders and other non-banks charge interest rates well over the state limit.
Every state has different caps on rates their banks are allowed to charge. If we happen to be talking about a national bank – like Wells Fargo or Citibank -- the cap would be whatever it is in the bank’s home state, no matter where the borrower lives.
Sometimes, payday lenders and other non-bank lenders will contract with national banks. The lenders take care of all the marketing, underwriting and servicing of the loans, as well as the risk if a borrower can’t pay. In return for a small fee, the lenders also get to use the national bank’s name on loan documents.
Under the proposed measures (one sponsored by North Carolina Republican Patrick McHenry and one by Indiana Republican Trey Hollingsworth), these lenders would also get to use the national banks’ interest rate caps. Even if the lender is in Minnesota, they can charge Utah-level interest rates, as long as that’s where the national bank they’re working with is.
These rates can get pretty severe. In 2013, a California payday lender called CashCall charged 342 percent interest on Minnesotans’ internet loans. The state took the company to court and the company was forced to pay over $11 million -- $7 million in outstanding loans and $4.5 million in restitution. If the new measures pass, Benjamin Wogsland, a spokesperson for Attorney General Lori Swanson, worries court decisions like this one will stop happening.
“We think it’s a recipe for disaster.”
Woglsand says the people hit hardest would be those living paycheck to paycheck -- the ones who can’t afford to get into a fender bender or get sick. If people fall on hard times and can’t qualify for bank loans, they usually end up at payday lenders or using non-banks on the internet. They could be signing themselves up for interest rates that are technically illegal in their state.
“What it means is payday lenders could charge higher and higher rates,” he says.
Swanson is one of 21 attorneys general signing onto a letter to Congress to reject the new legislation. Time will tell if it turns any heads in Congress.