Should Loans Retain Their Interest Rates if Sold or Transferred Across State Lines by the Lender? (H.R. 3299)

What is H.R. 3299?

(Updated February 20, 2019)

This bill would overturn a decision of the Second Circuit Court of appeals and permit nonbank financial institutions to charge interest rates that exceed certain state caps if a bank makes a valid loan and then sells or transfers the loan to a nonbank. It would reaffirm the legal doctrine that a loan’s interest is valid-when-made. This preemption of state usury laws would allow such loans to retain their maximum interest rate regardless of whether the loan is sold, assigned, or transferred to a third party in another state.

Argument in favor

This commonsense, bipartisan bill brings stability to financial markets by codifying the valid-when-made doctrine for interest rates on loans that are sold or transferred across state lines.

Argument opposed

State usury laws exist to protect consumers against loans with predatory interest rates, and lenders should have to abide by them even when the loans are transferred.

Impact

Borrowers; lenders; and banking regulators.

Cost of H.R. 3299

The CBO estimates that enacting this bill would have no effect on the federal budget.

Additional Info

In-Depth: Sponsoring Rep. Patrick McHenry (R-NC) introduced this bill to bring consistency to lending laws by codifying the doctrine that loans’ interest rates are valid-when-made and can be transferred across state lines without regard to state interest rate caps:

“By codifying long-standing legal precedent with the valid-when-made doctrine, we ensure that low- and middle-income Americans can access our financial markets. But this bill does more than promote financial inclusion, it also increases stability in our capital markets which have been upended by the Second Circuit’s unprecedented interpretation of our banking laws.”

Original cosponsor Rep. Gregory Meeks (D-NY) added:

“I have been encouraged by the innovative partnerships banks and fintech firms have forged to expand access to credit in under served urban and rural areas. Since the financial crisis, nearly 5,000 brick and mortar branches have shut their doors leaving many consumers without accessibility to affordable financial services. By partnering with fintech innovators, banks — including a number of those certified as Community Development Financial Institutions — have been able to achieve efficiencies in underwriting, allowing them to lower costs and reinvest in communities that stand to benefit the most. Such partnerships should be encouraged by policymakers and I am proud to work with Rep. McHenry to see that they are.”

Some House Democrats expressed opposition to this bill in its committee report:

“Proponents of this legislation argue that the status quo is problematic because it compels national banks to comply with a patchwork of state laws instead of oversight by federal banking regulators. However, if national banks are originating loans that they would not otherwise make because they know they will not hold the loans on their books, but instead immediately transfer them to a third party, this argument goes away as banks will have little to no interest in the loan.”

This legislation passed the House Financial Services Committee on a 42-17 vote and has the support of three cosponsors, including two Democrats and one Republican.

Media:

• Sponsoring Rep. Patrick McHenry (R-NC) Press Release
  
• Center for Public Integrity (Opposed)
  
• Financial Innovation Now (In Favor)