Opinion editor's note: Star Tribune Opinion publishes a mix of national and local commentaries online and in print each day. To contribute, click here . ••• Christine Westbrook's story is sadly not unique. This medical assistant and mom from Hastings took out a loan after falling on hard times that had an annual interest rate over 150%. The $1,000 in cash she received as a loan quickly became an $1,800 debt. Hers is one of many stories at Exodus Lending, a nonprofit that helps people escape the crushing debt of high-cost credit. Another borrower who quickly needed $3,000 for a car repair said, "It made me feel like I was drowning." And, as with most predatory credit schemes, low-income households of color are disproportionately targeted. Minnesota lawmakers smartly went after these schemes last year by passing legislation that capped interest rates on loans at 36%. However, a loophole in federal law still allows Minnesotans to legally be charged more. Fortunately, legislation proposed at the State Capitol ( HF 3680 ) offers a fix. The loophole, which allows predatory lenders to prey upon disenfranchised consumers and still charge interest rates above 100% comes from what's called a "rent-a-bank" arrangement. Banks can add their names to loans that are actually made by nonbank lenders. These nonbank lenders advertise, finance and collect debt on loans while "renting" out-of-state bank charters to charge interest rates above what is allowed in the borrower's state, interest rates that have gone as high as 600%. This can happen because of a law
Congress passed in 1980 aimed at addressing inflation. The Depository Institution Deregulation and Monetary Control Act allows state-chartered banks to lend based on the state laws they're headquartered in rather than where the borrower lives . In
Utah and a few other states, there are no interest rate limits, so banks based there can charge as much as they want. The law was trying to incentivize Americans to save money rather than spend it by allowing them to deposit with banks paying higher interest rates, even if the bank was in another state. More lending products also were created than ever before. And more is not always better. Minnesota Deputy Attorney General Jessica Whitney likened these loans to a "concrete life preserver" that quickly drown the borrower in debt and bad credit. Our credit reports control whether we can rent an apartment. They've also become a hurdle to stable employment with benefits, even though there is little to no evidence correlating credit and one's ability to maintain employment. Credit also controls your ability to buy a home — which can have a powerful impact on subsequent generations and their chances at economic stability. We are not on a level playing field with our lenders. Credit scores follow us around, but do we really know what they mean? Quite literally, we do not. The exact numeric formula behind the FICO score is protected as a trade secret. Yet our ability to live even the most basic of modern lives depends on our credit score, and one misstep could affect us forever. Luckily, the federal law that created this "rent-a-bank" loophole has a safety valve. States can opt out if they pass legislation, which is what HF 3680 would do here. Banks that are chartered out of state would be prevented from exporting high-interest loans to Minnesota. Attorney General Keith Ellison is committed to cracking down on illegal predatory lending and supports HF 3680. Without it, his office would have to waste our tax dollars by playing an expensive game of Whac-A-Mole trying to prosecute predatory lenders operating under other state's laws.
Colorado, Iowa and
Puerto Rico have already opted out of the law. Minnesota legislators should follow suit and build on the great work they did last year by preventing predatory rent-a-bank loans from pulling Minnesotans into the financial quicksand that destroys lives. Doing so will help protect our most vulnerable households, and the
American dream. Kim Vu-Dinh is an associate professor at Mitchell Hamline School of Law and director of its Economic Inclusion Clinic. Her research and writing focuses on economic disenfranchisement and the rise of corporate aggression.