The House Financial Services Committee held the first of a two-part hearing titled, “Rent-A-Bank Schemes and New Debt Traps: Assessing Efforts to Evade State Consumer Protections and Interest Rate Caps.”
For the first hearing, speakers included professors, consumer advocates and a member of the California Assembly.
The two-part hearing kicked off on February 5.
One major topic: the U.S. Court of Appeals, Second Circuit decision in Madden v. Midland Funding, where a three-judge panel held that national bank pre-emption does not extend to the purchase of debt originated by a national bank.
Resulting uncertainty led to legislative attempts to overrule the decision and, last November, a regulatory fix offered by the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC).
The proposed rule would codify the “valid when made” rule, where an assignee of a bank loan may charge interest at the loan rate if the bank was permitted to charge that rate at the time the loan was originated.
At the hearing, testimony and lawmaker commentary fell along party lines: Members of the industry and Republicans supported the regulatory proposal, while consumer advocates and Democrats disagreed with the need for regulatory action and argued it would lead to evasion of state usury limits by non-banks, particularly coupled with a new law in California that caps interest rates on certain types of consumer loans.