A year ago, the high cost payday loans that preyed on subprime borrowers appeared to be under attack.
In October 2017, the Consumer Financial Protection Bureau finalized federal regulations to force payday lenders to consider whether borrowers could actually repay their loans. These rules, combined with a some state laws which capped interest rates, were ultimately to restrict the scope of the industry. Even the age-old gadget to use Websites or even Indian Reserves make nationwide payday loans without respecting state consumer protections in the face of resistance of the state and federal law enforcement.
But now that framework is in tatters. CFPB Acting Director Mick Mulvaney has pledged to reconsider the salary rule and even without success joined a payday lender in court to argue against the regulation of his own agency. Mulvaney or his Trump-chosen successor will likely end up rescinding the rule before it goes into effect in August 2019. And state protections can be compromised by this week’s announcement that online lenders can apply for national banking charters.
The Office of the Comptroller of the Currency (OCC), which grants federal charters to banks, started accepting applications FinTech Tuesday (or “fintech “) companies like robotic stock advisers such as Improvement or lenders like SoFi Where Loan Club. “The federal banking system must continue to evolve and embrace innovation to meet the changing needs of customers and serve as a source of strength for the national economy, ”said Joseph Otting, who heads the OCC.
Otting’s announcement came just hours after the Treasury Department published a report recommend a national banking charter for fintech companies, in order to reduce “regulatory fragmentation. Treasury Department chief Steven Mnuchin previously worked with Otting at OneWest Bank, where Mnuchin was chairman and Otting as CEO. Thus, the main branch of OneWest, which carries a short and notorious story, has worked in tandem to boost fintech companies.
It may be wise to bring this growing number of businesses with banking-type activities within the banking regulatory infrastructure, so that federal regulators can more easily monitor the entire financial system. But giving financial technology companies national charters could rekindle the horrible story of federal bank regulators preempting state consumer protections, which would prove disastrous for borrowers.
Under a national banking charter, fintech companies would not be allowed to take deposits and would be subject to federal capital and liquidity standards and oversight by OCC bank examiners. If a company went bankrupt, the OCC would be responsible for unwinding it.
But OCC could also argue, as it often does with nationally chartered banks, that its rules supersede those of the states in which those companies operate. This would include caps on payday loan interest rates at 36 percent, as is the case of Oregon and several other states. State prosecutors could even be prevented from overseeing a FinTech company through reviews or subpoenas.
Fintech companies can currently operate nationwide by partnering with national banks for loans. But when it comes to issues like interest rate caps, they still have to follow the rules of the state where their borrowers live. If a national charter were put in place, these companies could ignore these rules, the OCC supporting them. This could allow online lenders to charge 582 percentage of annual interest, just like the average in Idaho, even potentially more.
This type of preemption was common as the financial crisis approached. In 2002, Georgia has adopted the country’s toughest anti-predation mortgage laws, but the OCC got ahead of the law for national banks, claiming that there was “no evidence that domestic banks engage in predatory lending practices. This created a chilling effect because, wary of a federal waiver, state legislatures simply stopped working on mortgage fraud laws.
A preemption for fintech could serve similar purposes. Think of online lenders who use big data to identify vulnerable potential borrowers. This targeting can steer people into expensive predatory loans, and states would be powerless to act under consumer protection or even privacy laws. And don’t expect only niche operators to cram into this space – Google or Amazon Bank is lurking in the distance, armed with much more information about which clients to use to sell loans.
In theory, the Dodd-Frank Act limits preemption and gives states the ability to sue banks. But by Dodd-Frank Section 1044, the OCC could always anticipate state consumer finance laws at its discretion, if the agency determines that the law discriminates against domestic banks or “hinders the exercise by the national bank of its powers.
Dodd-Frank also states that the OCC could not prevent the CFPB from enforcing its rules. However, these are precisely the rules laid down for the chopping block by President Trump’s handpicked team. In his report, the Treasury Department also recommended that the CFPB repeal the payday loan rule, ironically stating that “states already have the necessary regulatory authorities. But fintech companies could end up leading these authorities, if they are armed with a national banking charter.
The Treasury report states that the demand for small loans is high and the investment “unnecessary regulatory guidance ”on their use reduces access to credit for those who need it. At the OCC, Otting even encouraged the big banks like Wells Fargo and Bank of America to revert to low dollar lending, creating more options for borrowers. But state consumer protection rules exist to prevent shockingly high interest rates, multiple re-borrowing to pay off the previous loan, and deceptive practices that trap people in a seemingly permanent cycle of debt. The public is clearly not calling for the elimination of such laws which defend citizens against unscrupulous financial actors.
Trump’s deregulation gallery cannot take credit for this proposal on its own. Indeed, President Obama’s OCC, Thomas Curry, launched this idea in December 2016 through open concept national fintech charters for discussion. Curry knew he wouldn’t complete the charter until his tenure ended the following March. So he simply invented a tool that would allow his successor to easily undermine state consumer protections.
And that successor predictably crafted the worst possible version of a fintech charter, allowing state preemption and even weakening community reinvestment requirements for fintech companies, according to the House Financial Service Committee’s Democratic ranking. Maxine Waters. “This action could allow online payday lenders to use a federal charter to circumvent state usury laws and escape the responsibility of reinvesting in the communities where they operate, ”Waters said in a statement.
State banking regulators have called national fintech charters a “regulatory train wreck in preparation. “The New York banking regulator once tried to bar the OCC from granting national charters in court, but was turned away because the OCC had not completed the process. We can expect this lawsuit to resume once the OCC charters a FinTech company.
Until then, this development could put borrowers at serious risk. Removing state regulators from the field at a time when federal regulators have gleefully handcuffed each other leaves no one to protect the public.