District Of Columbia 2023-2024 Regular Session

District Of Columbia Council Bill B25-0609 Compare Versions

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Old	New	Differences
1	1	November 30, 2023
2	2	Nyasha Smith, Secretary
3	3	Council of the District of Columbia
4	4	1350 Pennsylvania Avenue, NW
5	5	Washington, DC 20004
6	6	Dear Secretary Smith,
7	7	Today, I am introducing the Protecting Affordable Loans Amendment Act of 2023 (PALs Act) to
8	8	prevent out-of-state lenders from partnering with state-chartered banks outside of the District to
9	9	evade the local usury cap of 24%. The Office of the Attorney General (OAG) has recently
10	10	investigated several predatory lenders, including EasyPay, which is alleged to have “charged
11	11	customers exorbitant interest rates averaging 163% APR - roughly 7 times higher than DC’s 24%
12	12	limit - trapping consumers in cycles of debt that threatened to ruin their credit scores and financial
13	13	security.”
14	14	1
15	15	The PALs Act is the result of collaboration between OAG, the Department of
16	16	Insurance, Securities, and Banking (DISB), and the Committee on Business and Economic
17	17	Development. This legislation strengthens the tools available for both DISB, the District’s banking
18	18	regulator, and OAG, the law enforcement agency charged with protecting consumers.
19	19	This type of abusive evasion of the District’s usury cap is possible under the Depository Institution
20	20	Deregulation and Monetary Control Act (DIDMCA), enacted by Congress in 1980, which
21	21	preempts state usury laws by arguably allowing FDIC-insured, state-chartered banks to contract
22	22	for the interest rate permitted by the state in which the bank is located and export that interest rate
23	23	into other states. Accordingly, a bank chartered in a state without an interest rate cap can therefore
24	24	purportedly lend at usurious rates in many states and in the District. DIDMCA was passed to level
25	25	the playing field for state-chartered banks after the Supreme Court ruled in Marquette Nat. Bank
26	26	v. First of Omaha Svc. Corp., 439 U.S. 299 (1978), th at nationally-chartered banks are exempt
27	27	from state usury laws.
28	28	DIDMCA, however, allows states and the District to opt- out from these federal provisions
29	29	regarding interest rates of state- chartered federally insured banks. If the District opts out of this
30	30	part of DIDMCA, the District can impose its usury caps to prohibit these state-chartered banks
31	31	(e.g., a Delaware or South Dakota bank) from importing that state’s usury regulations (neither state
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33	33
34	34	“AG Sch walb Secures Comprehensive Financial Relief for Consumers Deceived by Predatory Lend er,
35	35	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
36	36	exercised this opt-out (some like Iowa in the early years after DIDMCA was passed, and others
37	37	more recently, including Colorado in 2023) to strengthen state-level consumer protection and
38	38	enforcement against new technology- enabled platforms seeking to “rent” out-of-state banks and
39	39	import higher rate lending products into jurisdictions with lower usury caps.
40	40	The proposed legislation would exercise the District’s right to opt-out of the federal requirement
41	41	that the District apply the interest rates of state- chartered federally insured banks.
42	42	•This will close the loophole that allows foreign (as in non- District) state-chartered
43	43	banks to import usurious interest rates and largely end the explosion of
44	44	nontraditional, fintech- enabled efforts targeting District consumers with these types
45	45	of predatory loans.
46	46	•The proposed legislation also defines several key terms, including “lender ,” in the
47	47	Code to clarify what persons and entities are subject to lending regulations.
48	48	Currently, the definition of “lender” (or “true lender,” “de facto lender,” “lender in
49	49	fact,” “actual lender,” “nominal lender,” or “real party in interest”) comes from case
50	50	law and must often be re litigated case-by-case. This legislation would codify the
51	51	factors courts have used with substance-over-form doctrines to prevent entities
52	52	from structuring transactions to evade enforcement of consumer protection laws.
53	53	Please contact my Committee Director, Justin Kim, at jkim@dccouncil.gov if you have any
54	54	questions.
55	55	Sincerely,
56	56	Kenyan R. McDuffie 1
57	57	1
58	58	2
59	59	_________________________________ 3
60	60	Councilmember Kenyan R. McDuffie 4
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62	62	6
63	63	7
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65	65	9
66	66	A BILL 10
67	67	_____________________ 11
68	68	12
69	69	IN THE COUNCIL OF THE DISTRICT OF COLUMBIA 13
70	70	______________________________________________________ 14
71	71	15
72	72	To amend Chapter 33 of Subtitle II of Title 28 of the District of Columbia Official code 16
73	73	to exercise the District’s right under the federal Depository Institutions 17
74	74	Deregulation and Monetary Control Act to opt -out of the federal requirement that 18
75	75	the District apply the interest rates of state- chartered federally insured banks , and 19
76	76	to codify definitions of “lender” and “loan” to encompass loan transactions 20
77	77	structured to evade District requirements. 21
78	78	22
79	79	BE IT ENACTED BY THE COUNCIL OF THE DISTRICT OF COLUMBIA, 23
80	80	24
81	81	That this act may be cited as the “Protecting Affordable Loans Amendment Act of 2023”. 25
82	82	26
83	83	Sec. 2. Chapter 33 of Subtitle II of Title 28 of the District of Columbia Official 27
84	84	Code is amended as follows: 28
85	85	(a) The table of contents is amended by adding new section designations to read 29
86	86	as follows: 30
87	87	“§ 28-3311a. Lender defined. 31
88	88	“§ 28-3311b. Loan defined. 32
89	89	“§ 28- 3311c. Lendee defined. 33
90	90	“§ 28-3311d. Territorial application.”. 34
91	91	(b) Section 28- 3301 is amended by adding a new subsection (j) to read as follows: 35
92	92	“(j) In accordance with section 525 of the Depository Institutions Deregulation 36 2
93	93	and Monetary Control Act of 1980, approved March 31, 1980 (Pub. L. 96- 221; 94 Stat. 37
94	94	161) (“DIDMCA”), it is hereby expressly provided that the District does not w ant the 38
95	95	amendments made by section 521 of DIDMCA (12 U.S.C. § 1831d) to apply with respect 39
96	96	to loans made in the District.” . 40
97	97	(c) New sections 28-3311a, 28-3311b, and 28- 3311c are added to read as follows: 41
98	98	“§ 28-3311a. Lender defined. 42
99	99	“For the purposes of this chapter, the word “lender” means a person , including any 43
100	100	affiliate or subsidiary of another legal entity, that offers or makes a loan, arranges or 44
101	101	facilitates a loan for a third party, or acts as an agent for a third party in making or 45
102	102	servicing a loan, including any person engaged in a transaction that is in substance a 46
103	103	disguised loan or a subterfuge for the purpose of avoiding this chapter, regardless of 47
104	104	whether or not the entity or person is subject to licensing, and that: 48
105	105	“(a) Holds, acquires, or maintains, directly or indirectly, the whole , predominant, 49
106	106	or partial economic interest , risk or reward in the loan; 50
107	107	“(b) Markets, brokers, arranges, facilitates, or services the loan and holds or holds 51
108	108	the right, requirement, or first right of refusal to acquire, the loan or a receivable or 52
109	109	interest in the loan; or 53
110	110	“(c) The totality of the circumstances indicate that the person is the lender and the 54
111	111	transaction is structured to evade the requirements of this chapter . Circumstances that 55
112	112	weigh in favor of a person being considered a lender include, but are not limited to , when 56
113	113	the person: 57
114	114	“(1) Indemnifies, insures, or protects an exempt entity for any costs or 58
115	115	risks related to the loan; 59 3
116	116	“(2) Predominantly designs, controls, or operates the loan program; 60
117	117	“(3) Purports to act as an agent, service provider, or in another capacity for 61
118	118	an exempt entity while acting directly as a lender in other states, or 62
119	119	“(4) H olds the trademark or intellectual property rights in the brand, 63
120	120	underwriting system, or other core aspects of the loan program.” 64
121	121	“§ 28-3311b. L oan defined. 65
122	122	“For the purposes of this chapter, the word “ loan” means m oney or credit 66
123	123	provided to a consumer in exchange for the consumer’s agreement to a certain set of 67
124	124	terms, including, but not limited to, any finance charges, interest, or other payments, 68
125	125	closed-end and open- end credit, retail installment sales contracts, motor vehicle retail 69
126	126	installment sales contracts, and any deferred deposit transactions.” 70
127	127	“§ 28- 3311c. Lendee defined. 71
128	128	“For the purposes of this chapter, the word “lendee” means any person who 72
129	129	received a loan.” 73
130	130	“§ 28-3311d. Territorial application. 74
131	131	“A loan shall be considered as having been made in the District if the lendee is a 75
132	132	resident of the District at the time the lender receives either a signed writing evidencing 76
133	133	the transaction or modification, or a written or oral offer of the buyer, lessee, or debtor to 77
134	134	enter into or modify the transaction.” . 78
135	135	Sec. 3. Fiscal impact statement . 79
136	136	The Council adopts the fiscal impact statement in the committee report as the 80
137	137	fiscal impact statement required by section 4a of the General Legislative Procedures Act 81
138	138	of 1975, approved October 16, 2006 (120 Stat. 2038; D.C. Official Code § 1- 301.47a). 82 4
139	139	Sec. 4. Effective Date. 83
140	140	This act shall take effect following approval by the Mayor (or in the event of veto 84
141	141	by the Mayor, action by the Council to override the veto), a 30-day period of 85
142	142	congressional review as provided in section 602(c)(1) of the District of Columbia Home 86
143	143	Rule Act, approved December 24, 1973 (87 Stat. 813; D.C. Official Code § 1-87
144	144	206.02(c)(1)), and publication in the District of Columbia Register. 88