It’s been my life’s work to support entrepreneurship and economic stability, especially for low-income people. During my work with New Ventures Maine, I helped Mainers from all backgrounds gain financial literacy and independence. One of the hurdles people face when trying to get out of poverty is bad-actor lenders.
Thankfully, Maine law prevents lenders from issuing loans at outrageously high interest rates, capping rates at 30 percent. We know that when such limits aren’t in place, lenders charge extreme interest rates, bogging borrowers down by fees and interest, effectively ensuring they are unable to escape the burden of the loan. Even with this rate restriction, there are dishonest companies out there, particularly payday lenders, who try to use schemes to get around Maine’s consumer protection laws.
Through a tactic known as “rent-a-bank,” some payday lenders are luring at-risk Mainers into debt traps with annual interest rates of over 100 percent, sometimes up to 217 percent. Payday lenders specifically target low-income people, then use their low income and credit ratings as an excuse to charge extreme interest rates. This sort of practice is not only unfair but also outright predatory. And it’s on the brink of getting worse.
The federal Office of the Comptroller of Currency, which regulates national banks, has joined an aggressive push at the federal level to weaken consumer protections. Their latest action not only allows but also encourages predatory lending by putting individual states’ interest rate caps in danger – including Maine’s. This proposed rule allows dishonest lenders to pay an out-of-state bank a cut of their profits if the bank is willing to pose as the “true lender.” Under such a scheme, the predatory lender is the one managing the loan process and interacts with the borrower, meaning the out-of-state bank is the “lender” in name only.
With this rule, the Office of the Comptroller of Currency reveals that it is unconcerned about the average borrower, who is all too likely to get caught in a long-term cycle of “emergency loans.” Though payday loans are marketed as a bridge to the customer’s next payday, they are designed to be unaffordable and force the borrower into a cycle of repeat loans, which end up causing a cascade of financial hardships. Payday borrowers are more likely to experience bankruptcy than other borrowers.
The payday loan industry collects the vast majority of their fees – 75 percent – from borrowers who are caught in this cycle, those who have more than 10 loans per year. Last month, the Consumer Financial Protection Bureau gutted a rule that would have helped consumers avoid falling into a cycle of repeat loans by requiring payday lenders to look at a potential customer’s income and expenses to decide whether that customer can afford a high-cost loan. To be clear, this is the typical practice of honest lenders, as it supports responsible borrowing. Payday lenders, however, are incentivized to make loans their borrowers cannot afford so they are forced to take out new loans over and over again. Many borrowers end up paying two or three times the amount of the original loan just in fees, creating an expensive debt cycle that can last years.
This is just the latest example of federal authorities abandoning their duty to protect everyday people and undermining states’ efforts to protect consumers. The good news is, there is something you can do to hold these officials accountable.
I urge Mainers to join me in submitting a comment to the Office of the Comptroller of Currency by Sept. 3, urging them to rethink this rule and support real protections for everyday people. These protections are especially crucial now, as so many hardworking people and families are facing dire financial straits through no fault of their own. When we don’t put these basic protections in place, we are simply failing hardworking families when they need us most.
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