Hearing Considers Madden, Proposed Rate Cap

Financial Services Law

The House Financial Services Committee held the first of a two-part hearing titled, “Rent-A-Bank Schemes and New Debt Traps: Assessing Efforts to Evade State Consumer Protections and Interest Rate Caps.”

For the first hearing, speakers included professors, consumer advocates and a member of the California Assembly.

What happened

The two-part hearing kicked off on February 5.

One major topic: the U.S. Court of Appeals, Second Circuit decision in Madden v. Midland Funding, where a three-judge panel held that national bank pre-emption does not extend to the purchase of debt originated by a national bank.

Resulting uncertainty led to legislative attempts to overrule the decision and, last November, a regulatory fix offered by the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC).

The proposed rule would codify the “valid when made” rule, where an assignee of a bank loan may charge interest at the loan rate if the bank was permitted to charge that rate at the time the loan was originated.

At the hearing, testimony and lawmaker commentary fell along party lines: Members of the industry and Republicans supported the regulatory proposal, while consumer advocates and Democrats disagreed with the need for regulatory action and argued it would lead to evasion of state usury limits by non-banks, particularly coupled with a new law in California that caps interest rates on certain types of consumer loans.

For example, testimony from a representative of the Center for Responsible Lending encouraged the federal regulators to withdraw their proposals.

“Both the FDIC and OCC have stated that they do not support bank partnerships designed to evade state laws,” Graciela Aponte-Diaz told lawmakers. “But those agencies need to back up their words with actions. Until they act, there will continue to be a small number of banks and lenders who try to dodge state laws.”

On the other end of the spectrum, Rep. Patrick McHenry (R-N.C.) pointed out that for years prior to Madden, banks followed the “valid when made” doctrine, necessitating the action by the OCC and FDIC to overturn the decision.

“This is a commonsense rule of contracting that has existed for over 100 years until 2015 when [Madden] decided that no, banks cannot be sure that their loans hold any value when sold,” he said.

Also discussed at the hearing: proposed legislation that would extend the Military Lending Act’s interest rate cap of 36% to all consumer loans.

However, even some Democratic members of the committee declined to back the bill. Lenders will need to make larger loans in order to make them profitable, Rep. David Scott (D-Ga.) said. “This means that consumers may take up a larger loan than they need, which may place consumers in a financially precarious position. And the rate cap extends broadly to most types of credit and is not narrowly targeted to the payday lenders.”

Following the hearing, the Online Lenders Alliance issued a statement: “Today’s hearing clearly demonstrates that many members of the [committee] have more work to do when it comes to understanding the borrowers of these types of financial products, why consumers rely on them and their overall satisfaction with them,” CEO Mary Jackson said.

To watch the hearing or read the committee memorandum, click here.

Why it matters

While the two-part hearing shows that the committee is paying attention to the fallout from Madden and the OCC and FDIC efforts to reverse the decision, the testimony and legislative reaction fell predictably along party lines.

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