Murray, Potter introduce bill to end rent-a-bank predatory lending schemes


STATE HOUSE – While Rhode Island law caps the maximum interest on small loans at 36% annual percentage rate, loopholes allow many Rhode Islanders to pay rates as high as 260%. Sen. Melissa A. Murray and Rep. Brandon Potter have introduced legislation to close one such loophole that allows out-of-state banks to charge interest rates which would otherwise be illegal in Rhode Island.

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

Said Senator Murray (D-Dist. 24, Woonsocket, North Smithfield), “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. 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 (DIDMCA), 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. This legislation (2024-S 2275, 2024-H 7941) would opt Rhode Island out from the amendments to the DIDMCA that allow this 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%. We would not tolerate targeting small business owners with predatory interest rates and we should not tolerate this for Rhode Islanders in general.”

The Senate version of this bill is scheduled for hearing in the Senate Commerce Committee Tuesday.

This legislation would close one of two loopholes that allow pay-day lenders to charge triple-digit interest rates in Rhode Island. Rep. Karen Alzate (D-Dist. 60, Pawtucket, Central Falls) and Senate Deputy Majority Whip Ana B. Quezada (D-Dist. 2, Providence) have introduced legislation (2024-H 7211, 2024-S2141) that would close the other loophole, which allows storefront payday lenders to register as deferred deposit providers, or “check cashers,” allowing them to charge “fees” on their loans that can reach an effective APR of 260% on small loans.