Murray bill aims to end ‘rent-a-bank’ predatory lending schemes

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STATE HOUSE – Sen. Melissa Murray and Rep. Brandon Potter have introduced legislation that they say would close a loophole that allows out-of-state banks to charge interest rates that would otherwise be illegal in Rhode Island. The legislators note that while Rhode Island law caps the maximum interest on small loans at a 36 percent, loopholes allow many Rhode Islanders to pay rates as high as 260 percent.

“Non-predatory alternatives already exist for Rhode Islanders who need small loans, yet predatory lenders continue to hurt working Rhode Islanders to the enrichment of out-of-state companies,” said Murray, a Democrat who represents District 24 in Woonsocket and North Smithfield. “They lock borrowers into cycles of debt and poverty, and disproportionally target people of color. I am proud to work with my colleagues to end these predatory practices in Rhode Island.”

Under the federal Depository Institutions Deregulation and Monetary Control Act of 1980, state-chartered banks are allowed to follow the laws of the state they are charted in, rather than the one they are doing business in. This allows Rhode Island payday lenders to pay a fee to an out-of-state bank to formally underwrite their loans, avoiding Rhode Island protections against usurious interest rates.

“Lenders operating in Rhode Island should have to follow Rhode Island lending laws, and Rhode Islanders should be protected from outrageous interest rates,” said Potter of District 16 in Cranston. “Closing this loophole is a simple fix that is long overdue.”

The legislation – 2024-S 22752024-H 7941 – would opt Rhode Island out from the amendments to the DIDMCA that allow the practice, joining Iowa and Colorado in closing this loophole.

“Legislation from Representative Potter and Senator Murray would protect Rhode Islanders from small loan lenders who charge triple-digit interest rates,” said Alan Krinsky, director of research and fiscal policy at the Economic Progress Institute. “With a practice known as the rent-a-bank scheme, predatory lenders are using out-of-state banks to avoid Rhode Island’s interest rate laws capping annual interest at 36 percent. We would not tolerate targeting small business owners with predatory interest rates and we should not tolerate this for Rhode Islanders in general.”

The bill was sent to the Senate Commerce Committee on Tuesday, which recommended it be held for further study.

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