Bill Summary – FastDemocracy

November 30, 2023

Nyasha Smith, Secretary

Council of the District of Columbia

1350 Pennsylvania Avenue, NW

Washington, DC 20004

Dear Secretary Smith,

Today, I am introducing the Protecting Affordable Loans Amendment Act of 2023 (PALs Act) to

prevent out-of-state lenders from partnering with state-chartered banks outside of the District to

evade the local usury cap of 24%. The Office of the Attorney General (OAG) has recently

investigated several predatory lenders, including EasyPay, which is alleged to have “charged

customers exorbitant interest rates averaging 163% APR - roughly 7 times higher than DC’s 24%

limit - trapping consumers in cycles of debt that threatened to ruin their credit scores and financial

security.” 1 The PALs Act is the result of collaboration between OAG, the Department of

Insurance, Securities, and Banking (DISB), and the Committee on Business and Economic

Development. This legislation strengthens the tools available for both DISB, the District’s banking

regulator, and OAG, the law enforcement agency charged with protecting consumers.

This type of abusive evasion of the District’s usury cap is possible under the Depository Institution

Deregulation and Monetary Control Act (DIDMCA), enacted by Congress in 1980, which

preempts state usury laws by arguably allowing FDIC-insured, state-chartered banks to contract

for the interest rate permitted by the state in which the bank is located and export that interest rate

into other states. Accordingly, a bank chartered in a state without an interest rate cap can therefore

purportedly lend at usurious rates in many states and in the District. DIDMCA was passed to level

the playing field for state-chartered banks after the Supreme Court ruled in Marquette Nat. Bank

v. First of Omaha Svc. Corp., 439 U.S. 299 (1978), that nationally-chartered banks are exempt

from state usury laws.

DIDMCA, however, allows states and the District to opt-out from these federal provisions

regarding interest rates of state-chartered federally insured banks. If the District opts out of this

part of DIDMCA, the District can impose its usury caps to prohibit these state-chartered banks

(e.g., a Delaware or South Dakota bank) from importing that state’s usury regulations (neither state

1

 “AG Schwalb Secures Comprehensive Financial Relief for Consumers Deceived by Predatory Lender,

https://oag.dc.gov/release/ag-schwalb-secures-comprehensive-financial-relief (July 12, 2023).

has a cap on interest rates) when offering credit terms to District residents. Several states have

exercised this opt-out (some like Iowa in the early years after DIDMCA was passed, and others

more recently, including Colorado in 2023) to strengthen state-level consumer protection and

enforcement against new technology-enabled platforms seeking to “rent” out-of-state banks and

import higher rate lending products into jurisdictions with lower usury caps.

The proposed legislation would exercise the District’s right to opt-out of the federal requirement

that the District apply the interest rates of state-chartered federally insured banks.

             •   This will close the loophole that allows foreign (as in non-District) state-chartered

                 banks to import usurious interest rates and largely end the explosion of

                 nontraditional, fintech-enabled efforts targeting District consumers with these types

                 of predatory loans.

             •   The proposed legislation also defines several key terms, including “lender,” in the

                 Code to clarify what persons and entities are subject to lending regulations.

                 Currently, the definition of “lender” (or “true lender,” “de facto lender,” “lender in

                 fact,” “actual lender,” “nominal lender,” or “real party in interest”) comes from case

                 law and must often be relitigated case-by-case. This legislation would codify the

                 factors courts have used with substance-over-form doctrines to prevent entities

                 from structuring transactions to evade enforcement of consumer protection laws.

Please contact my Committee Director, Justin Kim, at jkim@dccouncil.gov if you have any

questions.

Sincerely,

Kenyan R. McDuffie

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 4                                                     Councilmember Kenyan R. McDuffie

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10                                          A BILL

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13                    IN THE COUNCIL OF THE DISTRICT OF COLUMBIA

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16   To amend Chapter 33 of Subtitle II of Title 28 of the District of Columbia Official code

17         to exercise the District’s right under the federal Depository Institutions

18         Deregulation and Monetary Control Act to opt-out of the federal requirement that

19         the District apply the interest rates of state-chartered federally insured banks, and

20         to codify definitions of “lender” and “loan” to encompass loan transactions

21         structured to evade District requirements.

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23          BE IT ENACTED BY THE COUNCIL OF THE DISTRICT OF COLUMBIA,

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25   That this act may be cited as the “Protecting Affordable Loans Amendment Act of 2023”.

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27          Sec. 2. Chapter 33 of Subtitle II of Title 28 of the District of Columbia Official

28   Code is amended as follows:

29          (a) The table of contents is amended by adding new section designations to read

30   as follows:

31          “§ 28-3311a. Lender defined.

32          “§ 28-3311b. Loan defined.

33          “§ 28-3311c. Lendee defined.

34          “§ 28-3311d. Territorial application.”.

35          (b) Section 28-3301 is amended by adding a new subsection (j) to read as follows:

36          “(j) In accordance with section 525 of the Depository Institutions Deregulation

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37   and Monetary Control Act of 1980, approved March 31, 1980 (Pub. L. 96-221; 94 Stat.

38   161) (“DIDMCA”), it is hereby expressly provided that the District does not want the

39   amendments made by section 521 of DIDMCA (12 U.S.C. § 1831d) to apply with respect

40   to loans made in the District.”.

41         (c) New sections 28-3311a, 28-3311b, and 28-3311c are added to read as follows:

42         “§ 28-3311a. Lender defined.

43         “For the purposes of this chapter, the word “lender” means a person, including any

44   affiliate or subsidiary of another legal entity, that offers or makes a loan, arranges or

45   facilitates a loan for a third party, or acts as an agent for a third party in making or

46   servicing a loan, including any person engaged in a transaction that is in substance a

47   disguised loan or a subterfuge for the purpose of avoiding this chapter, regardless of

48   whether or not the entity or person is subject to licensing, and that:

49           “(a) Holds, acquires, or maintains, directly or indirectly, the whole, predominant,

50   or partial economic interest, risk or reward in the loan;

51           “(b) Markets, brokers, arranges, facilitates, or services the loan and holds or holds

52   the right, requirement, or first right of refusal to acquire, the loan or a receivable or

53   interest in the loan; or

54           “(c) The totality of the circumstances indicate that the person is the lender and the

55   transaction is structured to evade the requirements of this chapter. Circumstances that

56   weigh in favor of a person being considered a lender include, but are not limited to, when

57   the person:

58                   “(1) Indemnifies, insures, or protects an exempt entity for any costs or

59   risks related to the loan;

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60                  “(2) Predominantly designs, controls, or operates the loan program;

61                  “(3) Purports to act as an agent, service provider, or in another capacity for

62   an exempt entity while acting directly as a lender in other states, or

63                  “(4) Holds the trademark or intellectual property rights in the brand,

64   underwriting system, or other core aspects of the loan program.”

65          “§ 28-3311b. Loan defined.

66          “For the purposes of this chapter, the word “loan” means money or credit

67   provided to a consumer in exchange for the consumer’s agreement to a certain set of

68   terms, including, but not limited to, any finance charges, interest, or other payments,

69   closed-end and open-end credit, retail installment sales contracts, motor vehicle retail

70   installment sales contracts, and any deferred deposit transactions.”

71          “§ 28-3311c. Lendee defined.

72          “For the purposes of this chapter, the word “lendee” means any person who

73   received a loan.”

74          “§ 28-3311d. Territorial application.

75         “A loan shall be considered as having been made in the District if the lendee is a

76   resident of the District at the time the lender receives either a signed writing evidencing

77   the transaction or modification, or a written or oral offer of the buyer, lessee, or debtor to

78   enter into or modify the transaction.”.

79          Sec. 3. Fiscal impact statement.

80          The Council adopts the fiscal impact statement in the committee report as the

81   fiscal impact statement required by section 4a of the General Legislative Procedures Act

82   of 1975, approved October 16, 2006 (120 Stat. 2038; D.C. Official Code § 1-301.47a).

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83          Sec. 4. Effective Date.

84          This act shall take effect following approval by the Mayor (or in the event of veto

85   by the Mayor, action by the Council to override the veto), a 30-day period of

86   congressional review as provided in section 602(c)(1) of the District of Columbia Home

87   Rule Act, approved December 24, 1973 (87 Stat. 813; D.C. Official Code § 1-

88   206.02(c)(1)), and publication in the District of Columbia Register.

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