The House just passed a bill that would override state usury caps on interest rates made by financial technology (fintech) companies or online and payday lenders, but it’s facing opposition from consumer financial protection advocates.
The bill — H.R. 3299, also known as the Protecting Consumers’ Access to Credit Act of 2017 — aims to accelerate fintech innovation and encourage business growth. There is a similar bill stalled in the Senate (S. 1642) over consumer financial protection concerns.
By allowing online companies to make loans at interest rates that may exceed some states’ usury limits, more small businesses and consumers may receive loans, thus improving credit access for entrepreneurs and needy individuals.
If passed, the bill would effectively cripple states’ ability to regulate online lenders and some fintech companies, and would encourage fintech companies to apply for national bank charters instead of state bank charters.
“This is a larger issue in at least two dimensions: first, the fintech companies have been trying now for at least two or three years to get charters from the controller of the currency,” Lawrence White, professor of economics at New York University’s Leonard N. Stern School of Business, told InsideSources. “The fintech companies have wanted a similar kind of national charter because they are obviously going to be headquartered someplace, but especially for fintech companies nowadays, scale is everything. They want to be able to operate and access as many customers in as many places as possible. They’re relatively small, relatively lean, and having to deal with 50 states would do-in their business model.”
Some states — like Arizona — have already told federal regulators to stay out of fintech and let states handle the regulation. Federal regulation overriding state authority in this matter means states will lose out on state banking charter revenue.
Varo Money, a fintech startup, became the first fintech company to receive preliminary approval for a national bank charter from the Controller of the Currency on Tuesday. If Varo Money nabs the charter, it will be “the first all-mobile national bank in the history of the United States.”
“This [House] bill advances the ball for [fintech companies] without waiting for the Controller of the Currency to give them a charter,” White said. “It’s giving them, in essence, a national charter. I’m guessing it will get passed and signed.”
White thinks the bill has a good chance of passing because current regulation of credit card companies sets a national precedent.
“The thing that echoes here is this same idea of being able to operate across the 50 states specifically with respect to usury laws was very important for credit card companies and still is important for credit card companies, so there’s adequate precedent for lenders having this kind of national charter to override the local state limits,” he said.
Small business coalitions, small bank associations and fintech groups sent a letter to senators Mark Warner (D-Va.) and Patrick Toomey (R-Pa.), co-sponsors of S. 1462, and representatives Patrick McHenry (R-N.C.) and Gregory Meeks (D-N.Y.), co-sponsors of H.R. 3299, in support of the bill last fall.
Some of the signers have also lobbied on the bill, including the American Bankers Association, Independent Community Bankers of America and the U.S. Chamber of Commerce.
Other notable groups who have lobbied on the bill include the National Association for the Advancement of Colored People (NAACP) and Harley-Davidson (which offers financing for the motorcycles it sells).
Rep. Emanuel Cleaver (D-Mo.) released a report on fintech companies and online lenders a few weeks ago, raising concerns that they disproportionately lend to poorer individuals and people of color and may discriminate against them as their algorithms for calculating interest rates are “black boxes” lacking transparency.
The Center for Responsible Lending (CRL) told InsideSources that because of consumer financial protection concerns, there is “equal speculation that the bill may not pass.”
“The top line is, there’s a narrative that this bill is necessary in order for fintech to innovate and evolve and expand credit access,” said the CRL’s Federal Advocacy Director Scott Astrada. “One, on its face, is not completely accurate. You could still make affordable loans under the current reg structure. What you can’t do is charge 400 percent interest rates. The bill is a very overly broad, all encompassing solution to a problem that doesn’t exist at this state.”
Astrada thinks financial innovation isn’t stifled by state regulation. On the contrary, he said, “financial innovation and technology should evolve alongside preexisting law.”
“What’s more at stake for us is the preemption of state law,” he said. “We see it continues to be the strongest bulwark for consumer protection. The state attorneys general have been aggressively pursuing bad actors and predatory lenders. South Dakota recently passed a ballot initiative, and this week Colorado put out a ballot initiative for a 30 percent cap on APR. These states have made an unequivocal claim that predatory lending is a problem and they’ve addressed it.”
Astrada fears the bill is too broad and will encourage malpractice in the lending community to the detriment of consumers.
“This bill would essentially open the floodgates and loopholes and target individuals unable to have the protection of the state law,” Astrada said. “That’s always the concern. We’ve expressed this to both cosponsors of the bill in the House and the Senate. During the House markup, a lot of members raised this issue as a big concern.”
NYU’s White believes consumers are fully capable of discerning predatory lenders apart from honest ones, especially since there is so much literature available on predatory lending available.
“By now I think any consumer understands they ought to shop around and be using their local bank and local credit union,” he said. “Sometimes they end up in the hands of a payday lender and my guess is fintech companies are probably going to be doing better than the payday lenders.”
But Astrada thinks the bill will only encourage wolfish payday lending across state lines: “Sen. Warner has publicly said there is a payday lending problem with this bill. We’ve seen lenders aggressively pursue regulatory loopholes.”
Given that about two-thirds of Americans can’t pass a basic financial literacy test, some regulators and think tanks believe it’s important to preempt financial malpractice with regulation as much as possible.
Further complicating the debate is whether young fintech companies can sustainably grow and innovate in a state regulatory environment. White says it’s extremely difficult, given that their business models rely on interstate e-commerce.
“They need some kind of a national presence, otherwise their business model just kind of collapses,” he said.
“A lot of the concern we have for this bill are what what we see in the current marketplace are high APRs and recurring default rates,” Astrada added. “While there is room for innovation, it can’t come at the expense of consumer protection. A toxic loan is a bad loan. No amount of innovation is going to change that.”
