Testimony in Support of H-7941 Relating to Commercial Law – General Regulatory Provisions – Interest and Usury

Testimony in Support of H-7941
Relating to Commercial Law – General Regulatory Provisions – Interest and Usury
House Committee on Corporations
March 26, 2024
Alan Krinsky, Director of Research & Fiscal Policy

The Economic Progress Institute supports Representative Potter’s H-7941, which would protect Rhode Island consumers from predatory lenders by having the state opt-out of certain provisions of the federal Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA).

Rhode Island State Law on small loans

According to R.I. General Laws §19-14.2-8, these are the maximum rates small loan lenders can charge:

• a maximum monthly interest rate of 3.0% on the principle of loans of $300 or less,equating to an Annual Percentage Rate (APR) of 36%
• a maximum monthly interest rate of 2.5% on the principle of loans above $300 up to $800, equating to an APR of 30%
• a maximum monthly interest rate of 2.0% on the principle of loans above $800 up to $5,000, equating to an APR of 24%

Therefore, small loan lenders in Rhode Island cannot charge more than 36% interest annually.

How the rent-a-bank scheme works

Ordinarily, banks and other financial institutions are regulated and bound by the laws of the states in which they do business. However, in 1980, Congress enacted the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA), allowing state-chartered banks to follow the interest rate limits of their home states instead of the lower interest rate limits of other states in which they do business. Although in 1978 Congress permitted nationally-chartered banks, including the largest and best well-known ones, to do so, this is simply not common practice, to charge triple-digit interest rates for any of their products.

With the rent-a-bank scheme, a lender (usually a fintech company without its own national or state charter) arranges loans – soliciting and processing the applications and managing almost every part of the lending process, including collection – yet at a critical juncture of the process pays one of these banks chartered out-of-state to sign off on the loan at triple-digit interest rates and then buys the loan. In essence, the lender is renting the bank for this one step in the process that allows the avoidance of state interest rate limits on small loans. This is why the rent-a-bank schemers have been accused of violating truth-in-lending rules. In the rent-a-bank scheme, the lender, which would otherwise be subject to state interest limits, tries to claim they are merely an intermediary arranging the loan, but for all practical purposes is the true lender, and not the bank chartered out-of-state.1

The rent-a-bank scheme operates in Rhode Island

According to the National Consumer Law Center (NCLC), the following five rent-a-bank lenders currently operate in Rhode Island: OppFi/OppLoans, EasyPay, Enova’s NetCredit, LoanMart, and Check ’n Go’s Xact.2 Check ‘n Go used to operate payday lending stores in Rhode Island yet closed them down a few years ago. All of these lenders charge triple-digit APRs in Rhode Island. To the right is an example from the OppLoans website, explicitly advertising a 160% APR.

Taking the middle example, a $3,000 loan with 12 monthly payments of $514.60, this means the borrower would pay $6,175.20 on the loan, over twice as much as the original principal. 3 The OppFi loan amount is typically larger than a payday loan, takes many months to repay, and is given at triple-digit rates, four times or more the limit on other small loan lenders in the state. The fine print also makes clear that there is no guarantee that the rate will not exceed 160% APR.

Although the Department of Business Regulation or Office of the Attorney General might have grounds under existing state law to challenge the operation of rent-a-bank schemers in Rhode Island, there is one simple and strong legislative solution available to Rhode Island policymakers: the DIDMCA opt-out. The 1980 federal legislation includes a provision for states to opt out of the federal act, to require banks chartered in other states to play by the same rules and interest rate limits as banks chartered in a state. At this time, only Iowa remains an opt-out state, joined by Puerto Rico. However, in 2023, Colorado became the second state to opt out, and this will go into effect in July 2024. A similar effort is underway in Washington, D.C. Rhode Island policymakers could enact legislation to add Rhode Island to this list and prevent the predatory rent-a-bank scheme from continuing to operate in the Ocean State.

Representative Potter’s H-7941 does just this. Using the language provided by the federal legislation, it opts Rhode Island out of this federal provision that allows lenders in other states to charge higher interest than Rhode Island’s own banks and credit union are legally allowed to charge. Opting out would level the playing field and prevent these predatory lenders from charging triple-digit interest rates to Rhode Islanders.