State lawmakers are considering a bill that supporters say would make it easier for Mainers with low credit scores to take out small loans: the law would give financial technology companies more leeway to partner with out-of-state banks and thus get around the state’s rate caps.

Opponents say the measure would undo protections against predatory lenders and leave consumers on the hook for much higher payments.

Maine has a 30 percent cap on interest rates for small-dollar loans up to $2,000, which has been in effect since 1997. The bill would allow financial technology or “fintech” companies to get around this cap, making it more attractive to offer small loans in the state while allowing the potential costs for borrowers to balloon.

The legislation, L.D. 314, would allow fintech companies, which would normally be subject to Maine’s rate caps, to partner with out-of-state banks in what multiple people called a “rent-a-bank scheme.” Out-of-state banks are able to lend to Mainers while subject to regulations in their own states — some of which have much higher interest rate caps or don’t have them at all.

In 2021, state lawmakers passed legislation to close this loophole: The measure established that the party with the major economic interest in the loan, such as a financial technology company, is the true lender and therefore is subject to Maine law. Opponents say L.D. 314 would undo those protections.

Attorney General Aaron Frey submitted testimony against L.D. 314, saying it would repeal a rule that is “a crucial tool that protects Maine’s consumers from predatory, out-of-state, unregulated lenders.”

Because of the way it’s written, the measure would also exempt nearly all traditional lending institutions, including banks and credit unions, from the interest rate caps, he added.

“This is the third attempt since 2021 by the fintech industry to repeal this important consumer protection,” Frey said in his testimony. “The Legislature rejected each of the previous attempts, and I urge it to do so again now.”

‘No one’s first choice’

Rep. Anne-Marie Mastraccio, a Democrat from Sanford who sponsored L.D. 314, said in her testimony that the 2021 measure greatly constricted the availability of small-dollar loans to Mainers with subprime credit scores. As a result, Mainers who need emergency access to credit have few safe options left, she said.

“In 2021, there was strong consensus that we needed to strengthen consumer protections for our most vulnerable,” she said. “We did that but failed to give them a safe option.”

Credit unions and large banks have been hesitant to support riskier consumers, she said, so her bill is designed to expand access to credit and also help the consumer demonstrate positive credit behavior.

“In my district and those like mine, I see and recognize how this bill might address temporary cash-flow imbalances and unexpected expenses during periods of economic stress,” Mastraccio said. “While small-dollar lending may be no one’s first choice, access to responsible and regulated small-dollar loans for subprime consumers provides a backstop for consumers who may otherwise be forced to use inferior, and potentially predatory options.”

Opportunity Financial — which describes itself as “a tech-enabled, mission-driven specialty finance platform that broadens the reach of community banks to extend credit access to everyday Americans” — testified in support of L.D. 314. Joseph Rubin, the company’s senior vice president of corporate communications and public policy, said the measure would help community banks make small-dollar loans in Maine.

Opportunity Financial’s typical loan in Maine is $1,500 with a seven-month repayment period, for a total repayment of about $2,200, Rubin said. OppFi already facilitates about 2,000 loans in Maine and 20 percent of those consumers default, he said.

“For the 80 percent that don’t default, a loan from one of our bank partners is a bridge, a way to deal with exigent circumstances that can be a life saver,” he said.

Life saver or cement block

Opponents, however, said these loans can do more harm than good for borrowers who are already struggling financially by trapping them in a cycle of debt.

The Center for Responsible Lending, a nonprofit policy group, has raised questions about Opportunity Financial’s practices. In 2021, Opportunity Financial settled a lawsuit brought by the attorney general in Washington, D.C., and agreed to pay $1.5 million to refund more than 4,000 consumers, waive over $640,000 in interest owed by those consumers, and pay $250,000 to the District.

“The settlement resolves a lawsuit filed by the Office of the Attorney General (OAG) against OppFi for misrepresenting its high interest loans as fast and easy cash and falsely claiming that its loans would help struggling consumers build credit. Instead, from at least 2018 until May 2020, OppFi provided loans to most District residents at a 160% APR — more than seven times the District’s 24% rate cap,” according to a press release from the attorney general’s office. 

Opportunity Financial defended its practices and told The Monitor it is addressing a need no one else is in Maine by lending to people who don’t qualify for mainstream credit, noting that access to credit is a challenge for many Mainers.

“OppFi is the one company in the state that is attempting to bridge this gap for consumers in good faith, while none of the opponents of this law have taken any concrete steps to serve these consumers since the bills’ passage in 2021,” a spokesperson wrote in an email.

Whitney Barkley-Denney, deputy director of state policy at the Center for Responsible Lending, said these loans are like giving a drowning person a cement block rather than a life saver: “It’s just going to drag them lower and lower.”

Local credit unions, borrowing from friends and family, or credit cards are all better options than these high-interest loans, she said.

Continued debate

Barkley-Denney said the volume of small-dollar predatory lending in Maine is relatively low compared to other states she’s worked with, primarily due to the rate cap. 

“Maine’s laws have been doing a good job of protecting people while allowing folks to borrow,” she said. “This is trying to fix a problem that doesn’t exist.”

The bill adds in underwriting standards for small-dollar loans that would move away from fixed rate caps to ones based on monthly gross income, but opponents said those standards aren’t a sufficient replacement for the rate cap. “To the extent (the measures are) proposed as a salve for the damage its other provisions will cause to consumers, it is obviously inadequate,” Frey said.

John Brautigam, with Legal Services for Maine Elders, said this measure could do more harm than good. Instead of being a short-term solution, these loans may “end up being a lasting burden on people that holds them back. Instead of helping them to build credit, it holds them down and pushes them further into their financial distress.”

Mastraccio, the bill sponsor, asked her colleagues to consider the alternatives.

“When you hear testimony against something like this, I encourage you to ask, ‘What could we do then?’” she said. “This is a real problem in my district for people who live on the edge and their only access may be to loans that are not going to help them, that are going to put them further in the hole, but yet in order to keep their jobs they need to fix their car and they don’t have those cash reserves.”

The Health Coverage, Insurance and Financial Services Committee will hold a work session on the bill at 9:30 a.m. on Wednesday, Feb. 26.

This story was originally published by The Maine Monitor, a nonprofit civic news organization. To get regular coverage from the Monitor, sign up for a free Monitor newsletter here.