Washington – Last night, Representatives Ron Kind (D-WI-3) and Gwen Moore (D-WI-4) broke with the rest of the state’s Democrats and joined Wisconsin’s Republican members of the U.S. House of Representatives in voting to pass a bill, H.R. 3299, that would allow lenders to launder loans through banks to override limits on high-cost loans, potentially paving the way for loans of up to 300 percent APR in states where those rates are prohibited. The U.S. Senate’s companion piece of legislation is S. 1642 and was introduced by Senator Mark Warner of Virginia.
“While Wisconsin has few limits on high-cost loans today, in recent years voters in states like Montana and South Dakota have limited interest rates to 36%. This bill could weaken the ability of Wisconsin to rein in predatory lenders in the future and help payday lenders that charge 100% to 300% or more to launder their loans through banks, which don’t have to obey state interest rate limits,” said National Consumer Law Center Associate Director Lauren Saunders. “Make no mistake: payday lenders will try to exploit this bill to obliterate state interest rate caps, the simplest and most effective method to protect consumers from unaffordable loans.”
“Payday lenders like Elevate are already using loan laundering to offer 100 percent interest loans in states where that is illegal, and this bill will embolden them” Saunders added.
More than 200 local, state, national, faith, and veteran groups oppose the legislation. Twenty attorneys generals also oppose related provisions in another pending bill (the CHOICE Act), noting in a letter to the U.S. House: “It is essential to preserve the ability of individual states to enforce their existing usury caps and [we] oppose any measures to enact a federal law that would preempt state usury caps.”
The pending legislation would override the Second Circuit’s Madden v. Midland decision to state that if a loan’s interest rate is legal when the loan is made, the loan remains valid even if it is assigned to another lender that cannot charge those rates. Marketplace lenders and some high-cost lenders have used banks (which are not subject to state interest rate caps) to originate loans that they cannot make directly, which the bank then instantly assigns to the real lender. However, some courts have questioned if the bank is the true lender. A separate bill, HR 4439, would specify that the true lender is determined by the paperwork, not the company that has the predominant interest in the loan.