Interstate lending reform proposal promises to level playing field for local lenders, end interest rate exportation by out-of-state banks

Written by Tom Feltner on May 12, 2010 - 12:00am

Woodstock Institute and Americans for Financial Reform (AFR) reached out to key Senators on Tuesday to express their support for interstate lending reform, which would ensure that out-of-state lenders could no longer supersede state interest rate limits that apply to local banks, credit unions, and other lenders.

This amendment, to be offered by Senator Sheldon Whitehouse (D-RI) during the floor debate on the Restoring American Financial Stability Act (S. 3217), would restore to the states the ability to enforce interest rate caps against out-of-state lenders. By doing so, it would level the playing field so that local lenders such as community banks, local retailers, and credit unions no longer are bound by stricter lending limits than national banks and credit card companies. It will also prevent payday lenders from circumventing local lending limits by structuring their products as loans made on bank-issued prepaid cards.

Under current law, national banks are bound only by the lending laws of the state in which the bank is headquartered. As a result, lenders have a strong incentive to locate in states with weak or non-existent interest rate restrictions. A handful of states, eager to attract lucrative credit card business and related tax revenues, have all but eliminated their consumer protections.

The Whitehouse Interstate Lending Amendment takes a strong step towards restoring to each state the ability to protect its citizens from lenders based in other states by reinstating protections that existed prior to the U.S. Supreme Court’s decision in Marquette National Bank of Minneapolis v. First of Omaha Service Corp (1978).

The amendment is co-sponsored by Illinois Senators Dick Durbin and Roland Burris.