Two Washington-based attorneys who represent banks, Charles Horn and Melissa Hall, wrote that while they believe the appeals court made the wrong ruling, its decision “will not result in significant changes to the law and principles of bank lending and usury.”
The question of whether it is difficult for small businesses to get credit is a politically charged one. McHenry and other Republicans argue that it is too tough and several federal regulations should be loosened as a result.
A survey of small business owners done by the National Federation of Independent Businesses – which backs McHenry’s bill – suggests that for now, at least, the problem is not so dire.
Only 3 percent of small business owners told the NFIB last month that all their borrowing needs were not met – a historic low, the NFIB said. Only 2 percent said financing was their top business problem.
The head of the Center for Responsible Lending, the leading critic of the McHenry bill, told a House committee in March that profits for banks are at record levels – and, banks make much of their money by lending.
Just as controversial is what McHenry’s bill might mean for North Carolina’s payday lending law if it passes the Senate and goes on to become law.
“The amount of misinformation about this simple bill has been surprising and frustrating,” McHenry told the Citizen Times via email.
On the House floor, he called arguments Democrats made against the bill “straw men that don’t have anything to do with the contents of this very simple bipartisan piece of legislation.”
Horn, an attorney with international law firm Morgan, Lewis & Bockius, has a similar view.
“There is nothing in the … bill that would make it harder or easier” for states to enforce their usury laws, he said.
After North Carolina banned high-interest payday lending, the lenders partnered with national banks that were exempt from the state law in what critics called “rent-a-bank” arrangements. The payday lending companies did all the work, but the loan money actually came from the bank, which then sold it to the payday companies.
It took a few years, but state regulators stopped the practice, convincing the courts that payday companies were the true lenders.
The issue of “who is the true lender” would still provide states or plaintiffs a legal basis on which to challenge rent-a-bank operations if McHenry’s bill passes, he said. “That’s not changed by this bill.”
Critics see it differently. So does a UNC Chapel Hill law professor not otherwise involved in the debate.
“We’re just throwing consumers to the wolves,” U.S. Rep. Carolyn Maloney, D-N.Y., told the House last week. “Let’s be clear: The only loans that would be allowed by this bill that are not already allowed are loans that violate state usury laws that are put in place in states to protect their consumers.”
Kate Sablosky Elengold, who teachers consumer financial law and attorneys’ professional responsibility at the UNC law school, said McHenry’s bill would clearly pre-empt North Carolina’s payday lending law.
Even if McHenry explicitly stated that was not his intention, it probably would not matter, she said.
“If the statute is clear on its face, then the courts don’t look beyond it” to statements made by lawmakers, she said. “The law speaks for itself.”
Kelly Tornow, director of North Carolina policy at the Center for Responsible Lending, said North Carolina regulators would “technically” be able to argue again that banks are not the true lenders if payday lenders partner with banks again in the state. That is “in part” how the state shut down payday lending before, she acknowledged.
“However, the U.S. Congress giving its blessing to rent-a-bank schemes will likely make it much more difficult for states and others to challenge these schemes,” Tornow said.
The arrangements are more complicated now and some courts may not even reach the question of who is actually making a loan, she said.
N.C. Attorney General Josh Stein is concerned the legislation will undermine North Carolina’s anti-payday lending law, said his spokeswoman, Laura Brewer.
A senior deputy attorney general for consumer protection from 2001 to 2008, Stein was involved in efforts by the state Department of Justice to shut down the lenders.
McHenry’s bill and a similar one in the Senate started out with significant bipartisan backing, but some Democrats have changed from support to opposition as consumer groups have raised concerns about its impact on payday and other forms of so-called “predatory” lending.
The bill passed the House 245-171 last week, but only 16 of 186 House Democrats present voted for it. That raises questions about its fate in the Senate, where at least nine Democrats must go along for most legislation to move.
Collins, the OnTrack president, hopes the bill goes no further.
She said she is leaving interpretation of the legal fine points to the Center for Responsible Lending. But she wants to avoid any risk that state regulators would be unable to keep the payday lending industry out of the North Carolina.
“People who are targeted by these companies are low-income, low-wealth families,” Collins said. “These loans trap them in a cycle of high-cost borrowing that jeopardizes their financial and housing stability. We do not need this product back in our state.”
What does it say?
A bill sponsored by Rep. Patrick McHenry, R-Lincoln, would add the following language to federal banking and lending laws:
“A loan that is valid when made as to its maximum rate of interest in accordance with this section shall remain valid with respect to such rate regardless of whether the loan is subsequently sold, assigned, or otherwise transferred to a third party, and may be
enforced by such third party notwithstanding any State law to the contrary.”
NC’s payday lending history
North Carolina was among the first states in the country to ban high-interest payday lending, passing a law in 2001 that effectively outlawed the practice by capping fees and interest rates.
The state was a magnet for the operations – many concentrated around military bases – and one study found that payday lenders made 2.9 million transactions involving $535 million in 1999.
Before it passed, payday lenders would charge what amounted to interest rates of 300 or 400 percent if considered on an annual basis. The loans were ostensibly designed to be repaid on the borrower’s next payday, but the high costs and borrowers’ tight finances often meant they paid on them for years.
For instance, a Winston-Salem woman recounted to The Associated Press paying more than $1,200 in fees over several years on what began as a $255 payday loan.
Some lenders got around North Carolina’s 2001 law for a few years by partnering with so-called “national” banks, meaning banks with a federal charter regulated by the federal government. They are exempt from state usury laws limiting how much interest can be charged on a loan.
In what critics call a “rent-a-bank” arrangement, the payday lender would operate storefront offices and its employees would take applications and hand out loan proceeds. Technically, the money for the loan came from a bank, but the bank typically transferred ownership of the loan to the payday lender as soon as it was made.
State regulators including then-N.C. Attorney General Roy Cooper, now the governor, acted to shut that down. They argued the payday lending companies were the true lenders and couldn’t take advantage of the loophole enjoyed by national banks. The courts agreed, putting the companies out of business in the state in 2006.
That’s where things stand today. It is legal to make a payday loan, but the interest rate on loans of $4,000 or less is capped at 30 percent. Some credit unions offer short-term loans to their members at rates below the cap.
North Carolina is one of 18 states by one count that have banned high-interest payday loans. There was discussion in the state General Assembly in 2013 of easing the law, but Gov. Pat McCrory opposed the idea and it died.