Today, Congresswoman Maxine Waters (D-CA), Ranking Member of the Committee on Financial Services, gave the following floor statement in opposition to H.R. 3299, a bill that would make it easier for bad actors to get around interest rate caps that states have put into place to protect borrowers from predatory payday debt traps.
As Prepared for Delivery
Mr. Speaker, I rise today in opposition to H.R. 3299, or the so-called “Protecting Consumers’ Access to Credit Act of 2017.”
There is a good reason over 200 civil rights, consumer, faith-based, housing, labor, and veterans advocacy organizations oppose this bill. The type of credit that this bill helps consumers access is the kind that makes it easier for vulnerable consumers to sink into insurmountable debt—like payday and other high cost loans.
H.R. 3299 expands the ability of non-banks to preempt state level consumer protections by stating that the interest rate on any loan originated by a national bank that is subsequently transferred to a third party, no matter how quickly after it is originated, is enforceable, which incentivizes riskier and predatory lending. And H.R. 3299 advances a dangerous precedent by allowing third parties that purchase loans from national banks to collect on interest rates that would otherwise be illegal because they exceed state caps.
Now, this bill is an attempt to overturn a court decision related to the legal concept of “valid when made” from the Second Circuit Court of Appeals in Madden v. Midland Funding, LLC. In that case, the Court held that when loans are transferred from banks to non-bank third parties, they must maintain the same terms, rates, and conditions as required by the state where the originating bank is chartered. Despite claims by proponents of the bill, legal experts have explained in testimony that “the ‘valid-when-made’ doctrine is a modern invention, not a ‘cornerstone’ of US banking law.”
The Madden decision is only the rule of law in the states under the Second Circuit, which are Connecticut, New York, and Vermont, but some industry advocates, particularly marketplace lender “fintechs,” have argued the ruling and confusion about “valid when made” caused such great market ambiguity that it has resulted in reduced lending to needy borrowers in those states. But those claims have not been substantiated. The only purported evidence we have on the effect of the Madden ruling is a single, unpublished study that cannot even be peer reviewed because it relies on private data from a single, unidentified marketplace lender.
And the authors of that study have not endorsed this bill. In addition, 20 state attorneys general, including the attorneys general for all three states under the Second Circuit, oppose this legislative change. But you know what? Predatory lenders are worried about the Madden case for a different reason. Elevate, an online payday lender, is scared that they won’t be able to continue making predatory loans if the Madden decision stays in place. In their public filings with the SEC, Elevate said that “[T]o the extent that [the holdings in Madden] were broadened to cover circumstances applicable to Elevate’s business, or if other litigation on related theories were brought against us and were successful … we could become subject to state usury limits and state licensing laws, in addition to the state consumer protection laws to which we are already subject, in a greater number of states, loans in such states could be deemed void and unenforceable, and we could be subject to substantial penalties in connection with such loans.”
Mr. Speaker, I do not doubt the sincerity of the good actors that may be trying to navigate a difficulty the Madden ruling potentially caused. But this isn’t just about those businesses, because H.R. 3299 would go much further to allow other third-parties, including payday lenders, to evade or outright disregard state-level laws, and collect debt from borrowers at unreasonably high rates of interest if they purchase loans from a national bank. These arrangements are called “rent-a-bank” or “rent-a-charter” agreements, and they allow payday lenders to use banks as a front for predatory behavior and the evasion of state interest rate caps. Payday loans drain wealth from low-income consumers, particularly those in communities of color, and payday loans trap their borrowers into a cycle of debt that it takes years to climb out of with high interest rates that are often in excess of 300 percent.
So let’s be clear that instead of simply overturning the Madden decision, H.R. 3299 would go far beyond that and codify an expanded preemption power without any proof that it will benefit consumers. In fact, all we do know is that the bill will make it easier for bad actors to evade safeguards that states have put into place to protect borrowers. We cannot advance a bill that will allow non-banks, like payday lenders, to ignore state interest rate caps and make high-rate loans. While Congress has preempted some state laws for national banks, it did not authorize national banks to extend the privilege to whatever entities they so choose. I urge my colleagues to oppose this bill, and I reserve the balance of my time.