Human Rights Watch Letter to Congress RE: Joint CRA Resolution Against Predatory Lending (SJRes.15/HJRes.35)

Dear Speaker Pelosi, Majority Leader Schumer, Minority Leader McCarthy, Minority Leader McConnell, Chairwoman Waters, and Chairman Brown:

Human Rights Watch urges you to support joint resolution SJRes.15/HJRes.35, which would use the Congressional Review Act to repeal the Office of the Comptroller of the Currency (OCC) rule, “National Banks and Federal Savings Associations as Lenders.”

This OCC rule, which was enacted by the administration of former President Donald Trump and came into force in December 2020, changes the definition of bank loans, which are largely exempt from state-based interest rate caps, to include any loan agreement for which a federally chartered bank is named as the lender.[1] If Congress does not act, this rule’s simple change in language will have profound consequences for millions of Americans, resuscitating predatory “Rent-A-Bank” schemes, undermining vital legal protections in almost every state, and expanding opportunities for unscrupulous lenders to prey upon the most vulnerable communities in the United States.

Human Rights Impacts of Predatory Lending

The Covid-19 pandemic has exacerbated and exposed the already immense disparities in income and wealth that exist between Americans.[2] At the end of 2019, US households held an astonishing 43.6 percent of all global financial assets.[3] During the first 11 months of the pandemic, the total net worth of billionaires in the United States grew by 44 percent or $1.3 trillion while an additional 110 people became new billionaires in the US.[4]

Things are much, much more challenging for those at the other end of the income spectrum. The Congressional Budget Office forecasts that the nation’s unemployment rate will stay above pre-pandemic levels through the rest of the decade.[5] Full-time minimum-wage workers cannot afford a one-bedroom rental at fair market rent in 95 percent of the country.[6] Despite efforts to provide a financial safety net for Americans who are struggling through the pandemic, nearly one-third of people in the US do not have enough in savings to cover an unexpected cost of four-hundred dollars, and 15 percent cannot pay their monthly bills.[7]

For these people, paying for an unexpected expense, like auto repairs or paying for a child’s medical emergency, requires a loan since income and savings do not suffice.

Payday and other non-bank lenders have filled the need for small-dollar, accessible credit for millions of Americans but at a very, very high cost. Approximately 12 million people take out payday loans each year, and there are more than 16,000 payday lender locations across the country, predominantly in low-income neighborhoods and communities of color.[8]

Unfortunately for many people who are placed in the position to borrow from these small-dollar and short-term lenders, the extortionate interest rates and fees that can accompany these “small loans” show just how expensive it is to be poor in the United States.

Research from the Pew Charitable Trusts has found that the average payday loan customer borrows just $375, but ends up paying an additional $520 in fees alone.[9] In part, this is because the average borrower would have to sacrifice 36 percent of their next paycheck to pay off a loan of this size.[10] For people who already did not have enough to cover $375 in expenses to begin with, sacrificing more than one-third of a paycheck may not be possible.

The consequences of failing to pay off such a loan can be dire. The triple-digit interest rates that can accompany these loans may easily trigger a downward spiral of indebtedness, where people continuously roll-over and refinance, incurring more and more fees while falling further and further into debt.[11] This cyclical debt trap is evident in the data: in 2014, the Consumer Financial Protection Bureau found that 80 percent of payday loans were taken out within two weeks of a previous payday loan.[12]

This problem has deep roots. Nearly a decade ago, Human Rights Watch documented the impacts of predatory payday lending in some of the poorest parts of the United States: Native American reservations.[13] Our research in South Dakota and New Mexico showed that a disproportionate number of people living on reservations depended on short-term loans to meet unexpected expenses.

As part of that research, in 2012, Human Rights Watch conducted interviews with nearly 400 people on reservations around the country. More than half reported having trouble repaying a payday loan, and over 70 percent found that the loan repayment process made covering regular household expenses more difficult.[14] Some even found themselves having to forego food or delay paying rent and utilities to afford their loan payments.[15] While these findings are from several years ago, the health and economic impacts of the Covid-19 pandemic have hit Native American and Alaskan Native communities particularly hard, likely exacerbating these troubling trends.[16]

Access to fair credit is vital for many Americans to meet their most basic needs. But Americans should be able to take a loan to cover an emergency—or even an everyday expense—without fees and interest rates entangling them in perpetual debt or forcing them to choose between repayment and food. Luckily, there is a simple and effective solution.

The OCC Rule Undermines Protections for Borrowers

Interest rate caps can protect people who borrow “small loans” from this downward spiral into indebtedness.[17] Rate limitations of some kind are now in place in over 43 states and in the District of Columbia, including both South Dakota and New Mexico, which implemented protections for borrowers like those Human Rights Watch interviewed on Native American reservations.[18]

As of March 2021, 18 states and the District of Columbia cap interest rates and fees for payday loans at 36 percent.[19] These and other state-based interest rate caps on small-dollar and short-term loans are crucial protections for borrowers.[20] But if the OCC rule comes into effect, these laws would be rendered toothless by opening the door to so-called “Rent-A-Bank” schemes.[21]

In their various forms, these schemes require a partnership between a non-bank lender—like a payday or auto-title lender—and an OCC-regulated national bank or federal savings association, which are largely exempt from state-based interest rate caps.[22] Under the OCC rule, any loan agreement would also be exempt from these state-based interest caps if an OCC-regulated bank is named as the lender in the loan agreement—regardless of whether a non-bank lender arranged for the loan, will profit from the loan, or will seek repayment from the borrower.[23]

Rather than following the money, the OCC rule bakes in a willful ignorance towards the actual origin and purpose of loan agreements, allowing payday and other small-dollar and short-term lenders to sidestep interest rate caps by having an OCC-regulated bank serve as an intermediary between them and borrowers. In turn, this allows non-bank lenders to ignore financial protections enacted in almost every state, charge extortionate interest rates, and trap vulnerable consumers in this devastating cycle of debt.

Support the Congressional Review Act Challenge of the OCC Rule

While more federal action is needed to help lift the low-income borrowers of short-term loans out of poverty or precarity, closing regulatory loopholes like the one created by the OCC rule is a crucial step toward reducing exploitation of the economically vulnerable and protecting their human rights.

The OCC rule will expand opportunities for unscrupulous lenders to prey upon the most vulnerable communities in the United States. That Congress would allow this rule to go into effect during an ongoing public health and economic crisis that has disproportionately impacted these same communities would be particularly cruel.

Shutting off this pathway for predatory lenders to evade caps placed on their interest rates will help prevent people from falling into debts that they can never afford to repay, sparing Americans from having to choose between paying down a loan or putting food on the table.

We urge Congress to use the Congressional Review Act to prevent this from happening. Passing the joint resolution (SJRes.15/HJRes.35) is a simple step that will have an outsized positive impact on the lives of Americans throughout the country.

We would be happy to provide additional information, and also welcome the opportunity to further discuss this issue. If you would like to arrange such a meeting, please contact Namratha Somayajula (somayan@hrw.org).

Sincerely,