The American Prospect is a nonprofit, independent magazine covering public policy and politics. Sludge is re-publishing this article.
The House returns to session this week, and in a rare twist, a handful of Senate-passed measures await action. The upper chamber advanced three “resolutions of disapproval” under a statute called the Congressional Review Act (CRA), allowing Congress to nullify certain executive branch regulations. The three resolutions, respectively, would eliminate weak Trump-era standards regulating methane emissions, take down Equal Employment Opportunity Commission rules that put up barriers to credible worker discrimination claims, and roll back the Office of the Comptroller of the Currency’s (OCC) “true lender” rule, which allows predatory lenders to evade state interest-rate caps. House Speaker Nancy Pelosi’s spokesperson Henry Connelly has told the Prospect that some or all of these resolutions would get a vote during the June work period.
The last one, on the true lender rule, passed the Senate on a bipartisan 52-47 vote, with three Republicans in favor. Given that momentum, and the difficulty of making a viable argument that lenders should be able to charge 400 percent interest on a consumer loan when a state caps that rate at 30 percent, a majority vote in the House would seem fairly well assured. But that’s not how things are working out.
Rep. Maxine Waters (D-CA), chair of the House Financial Services Committee, has asked the full House to take up the resolution “as soon as possible.” But majority support has not yet been secured, as members and staffs begin to drill down on the somewhat complex issue.
Critically, according to six sources with knowledge of the situation, Rep. Josh Gottheimer (D-NJ), a bank-friendly member of the House Financial Services Committee, has been lobbying colleagues to vote against the true lender resolution, threatening passage and potentially subjecting thousands of consumers to usurious interest rates. With Gottheimer leading the opposition, and thin Democratic majorities in the House, just a handful of members, if no Republicans come aboard, could bring the resolution down.
That the House would be a heavier lift than the Senate on the true lender resolution may be surprising. But financial issues often have a harder time in the lower chamber. The Dodd-Frank financial reform law got stronger in the Senate and weaker in the House, for example. The Financial Services Committee has been historically constructed as a landing spot for members seeking campaign donations from Wall Street, or members from neighboring districts with well-heeled constituents in the industry.
Gottheimer, from the bedroom communities of northern New Jersey, represents both. He received $1.3 million in donations from the securities and investment industry in the last election cycle, according to the Center for Responsive Politics, and another $800,000 from the real estate and insurance sectors. Gottheimer also received $24,900 from payday lenders, the third-largest amount of support of anyone in the House of Representatives. Since coming to Congress in 2016, Gottheimer has taken $6 million from the finance, insurance, and real estate sectors.
“If any Democrat is sabotaging this bipartisan rebuke of Trump’s scheme to let predatory lenders skirt state-level consumer protections, it certainly wouldn’t be on the grounds that 400 percent interest rates are good policy,” Accountable.US president Kyle Herrig told the Prospect. “If a lawmaker is acting like they are completely beholden to industry money, it’s probably because they are.”
At another level, Gottheimer’s stance on the bill is at odds with his public persona. He is the co-chair of the Problem Solvers Caucus, which is committed to bipartisan solutions. The true lender CRA is one of the few bipartisan bills to come out of the Senate this year. In addition, one of the cases most associated with the true lender rule comes out of Gottheimer’s home state of New Jersey.
Rep. Gottheimer’s office did not respond to a request for comment.
More than half of all states restrict the annual percentage rate (APR) on consumer loans; New Jersey, in fact, caps individual consumer lending rates at 30 percent. But the National Bank Act of 1864 allows “preemption” of state laws for federally chartered banks that do not reside in the state. Some financial wizards devised that if you launder non-bank loans through a federally chartered bank, you can get the preemption protection, charge whatever interest rate you want, and avoid state caps. This is particularly useful for online “fintech” lenders who want to offer loans nationwide.
It’s sometimes called a “rent-a-bank” scheme. The bank would have no real interest in the loan, but as long as their name is on the loan agreement somewhere, they become the “true” lender for the purposes of avoiding the interest-rate cap. Non-bank lenders love it because it facilitates their ability to charge more; banks love it because they get a fee for doing nothing but putting their name on some documents. The only losers here are the borrowers, gouged with higher interest rates than what should be legal in their states.
Opportunity Financial, an online lender, uses this rent-a-bank scheme in partnership with FinWise Bank, making loans with 160 percent APRs in 24 states and the District of Columbia. Opportunity Financial’s political action committee has donated to Josh Gottheimer. Other fintech companies that partner with banks to make loans would presumably have an interest in the matter, offering another potential vein of campaign funds.
Another rent-a-bank example comes out of Gottheimer’s home state. A restaurant owner in Paterson, New Jersey, received a $67,000 loan at 268 percent interest, way out of step with state law. World Business Lenders was able to make this loan because they laundered it through Axos Bank, which has an OCC-administered federal bank charter. The collateral was the owner’s property, and they now face foreclosure. Paterson is in the congressional district adjacent to Gottheimer’s.
The Supreme Court made rent-a-bank schemes illegal in 2015, but Donald Trump’s OCC “clarified” the statute, based on a made-up doctrine that it decided was “well-settled law.” Because the OCC rule was completed late in the Trump administration, Congress had the ability to use the CRA to wipe it out, quickly restoring state consumer protections. President Biden has expressed his support for the resolution.
The Senate passed the true lender CRA on May 11, with Republican Sens. Susan Collins (R-ME), Cynthia Lummis (R-WY), and Marco Rubio (R-FL) in support. Rep. Chuy Garcia (D-IL) has introduced the companion measure in the House. The resolution has picked up editorial board support in West Virginia and Alaska, and Republican attorneys general from Arkansas, South Dakota, and Nebraska (where voters passed an interest-rate cap last year with 83 percent of the vote) are in support.
“The bipartisan Senate vote to overturn the fake lender rule is a show of disapproval of the harmful rent-a-bank model that is being used by predatory payday and installment lenders to make triple-digit interest rate loans that are illegal across the country,” said Rachel Gittleman, financial services and membership outreach manager for the Consumer Federation of America. “The House of Representatives must act to repeal the rule, which is doing active harm right now by defending this predatory model.”
Advocates have held briefings on Capitol Hill to educate House members, but while there was little opposition on the Senate side, opponents have been more vocal in the House. The American Bankers Association and some other financial trade groups have opposed the resolution, claiming that it would reduce access to credit, and if by “credit” you mean wildly overpriced loans well above state interest-rate caps, then that’s true. Banks have partnerships with fintech and other lenders on a variety of loan relationships, and see any effort to protect consumers as potentially fatal to those efforts.
“They may attempt to wrap themselves in the mantle of innovation or claim to be helping people access credit,” said Linda Jun, senior policy counsel for Americans for Financial Reform, “but in reality they are facilitating lenders’ ability to get them into debt burdens they cannot afford.”
Others have made the argument that if a rule is nullified under the CRA, agencies like OCC would be unable to introduce any “substantially similar” rule, tying their hands on rulemaking. But the true lender rule is only four sentences long, and adding any kind of guardrail or other caveat to it would make it not substantially similar. Moreover, the Trump administration passed multiple rules after CRA resolutions nullified them, and no court stepped in to block them.
Advocates believe that, with enough time, they can convince members to back the resolution. But it’s an obscure, wonky issue, and having pro-bank members like Gottheimer turn it into a question of “certainty” and maintaining lending partnerships muddies the waters.
Alexander Sammon contributed reporting.