One hallmark of President Trump’s tenure is the zeal with which federal agencies have sought to shred federal regulations, either by repealing or simply not enforcing them. That’s been true even in cases where the deregulation is likely to raise costs for the public more than it will lower them for industry, as is the case with the administration’s effort to ease limits on methane emissions.
But the administration’s assault on regulations hasn’t been confined to those adopted by the federal government. Trump also has sought to prevent state governments from imposing their own rules to protect consumers and businesses within their borders — for example, by suing California for adopting net neutrality rules that bar broadband internet providers here from interfering with the traffic on their local networks.
Now, the administration is on to its next outrageous proposal. Two top federal bank regulators — the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency — want to allow lenders to evade state consumer protection laws in order to charge obscenely high interest rates. Proposed rules by the two agencies would bless “rent-a-bank” schemes in which high-cost lenders join forces with national or federally insured state banks to market and issue loans with interest rates far above state interest caps.
California and other states have imposed such caps (36% is a common maximum) because non-bank lenders were charging 100% or more to borrowers with bad credit ratings and, in most cases, low incomes. These companies argued that the high interest rates were needed to compensate for the potential losses posed by risky borrowers, but the loans often sucked those borrowers into a debt trap they couldn’t escape. The state-imposed rate caps make it harder for desperate borrowers to obtain loans that leave them in even worse shape financially, pushing them toward less damaging alternatives.
National and federally insured state banks are not subject to state caps because they are covered by federal banking laws that preempt state consumer statutes. And in practice, these banks have stayed away from high-interest loans, presumably because federal bank examiners would consider them too risky. In the early 2000s, federal regulators also cracked down on the rent-a-bank model, which involves a non-bank lender signing up customers for high-interest loans that a bank issues, then sells back to the non-bank lender.
The Trump administration, which had moved previously to deregulate predatory payday lending, proposes to reverse that crackdown, reopening the door to rent-a-bank arrangements. That prompted about two dozen state attorneys general (including California’s) to accuse the two bank regulators of misreading federal law in their effort to erase state consumer protections. They’re right: The freedom granted to federally regulated banks doesn’t extend to unregulated non-bank lenders. If the administration doesn’t abandon its effort to promote predatory loans, the courts should stop it.