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June 25, 2020

Bank Regulators are Paving the Way for Loan Sharks, Payday Lenders and Debt Collectors to Gouge Consumers with Sky-High Interest Rates

Thursday, June 25, 2020
Contact: Pamela Russell at 202-618-6433 or
Washington, D.C.  – Tim P. Clark, Distinguished Senior Banking Adviser for Better Markets, issued the following statement on the FDIC’s release today of its final rule aimed at overriding state consumer protection laws:
“The FDIC has now delivered the second blow in a one-two punch aimed at knocking out state laws put in place to protect borrowers from predatory lenders that charge shamefully high interest rates and fees. The FDIC rule comes on the heels of a similar rule released by the OCC just a few weeks ago. The end result is that nonbanks will have more leeway to side-step state usury prohibitions and wring every last dollar from borrowers by partnering with federally regulated banks.
“For years, federally regulated banks have been able to override state consumer protection rules against charging outrageously high interest rates on consumer loans. Now bank regulators want to ensure this preemption of state law extends beyond just banks and applies to all manner of nonbank entities, which often seek to form alliances with banks to skirt state consumer protection rules or buy banks’ overdue loans for collection.
“The issue took on renewed importance after the Second Circuit ruled in 2015 that preemption of state law does not and should not apply to an independent, nonbank debt collector that buys loans from federally regulated banks. Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015). That decision made some banks and their would-be partners nervous. They want to make sure that nonbank financial firms— ranging from online lenders to payday loan sharks and debt collectors—can continue with their “rent-a-bank” schemes, piggybacking on the charters of federally regulated banks to evade state usury laws.
“Now they have apparently prevailed on the FDIC (and the OCC) to issue rules attempting to nullify the Madden decision. As the court in Madden correctly observed, however, that essentially amounts to an “end-run” around important consumer protections that many states have seen fit to adopt.
“As we argued in our comment letter, the rule is not just bad policy that will expose millions of consumers to gouging, sky-high interest rates, it’s also bad rulemaking. For example, nowhere in the rulemaking process did the FDIC adequately address the clear threat to consumers this rule represents. The agency essentially ignored the vulnerabilities of consumers and instead worried that the Madden ruling “could adversely affect” the emerging rent-a-bank business model. 
“Moreover, the FDIC offered scant data at best to support its claim that the Madden decision has created uncertainty that could interfere with the ability of banks to sell loans, maintain liquidity, or manage risks. In fact, in a startling admission, the FDIC conceded in the rule proposal that it was aware of no significant negative effects resulting from the Madden decision.  In the final rule release, the agency essentially retreated to the claim that it should adopt a “prophylactic rule” to prevent supposed problems in the future.
“Unfortunately, the FDIC appears to be in lock step with the prevailing march toward de-regulation in the banking system and financial markets, all without a credible justification and often at the expense of countless American consumers.”
Better Markets is a non-profit, non-partisan, and independent organization founded in the wake of the 2008 financial crisis to promote the public interest in the financial markets, support the financial reform of Wall Street and make our financial system work for all Americans again. Better Markets works with allies – including many in finance – to promote pro-market, pro-business and pro-growth policies that help build a stronger, safer financial system that protects and promotes Americans’ jobs, savings, retirements and more. To learn more, visit
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