State of the States

Tara Rider, Head of State Government Affairs

June 21, 2023

3 min read

A Dynamic Cross-Section

The cross-section of banking and technology continues to bear dynamic consumer solutions—and equally dynamic challenges. As individual access to banking services proliferates, so do the players in fintech banking. How to distinguish between true lenders and predatory? How to maximize consumer protection while allowing for growth and innovation? Working closely with policy makers and industry partners, Cross River helps to bridge regulation, legislation, and statutory policy to ensure consumer protection is always top of mind.

The State of Interest

The standards one adheres to, the pillars one builds on, and the guidelines one abides by differentiate responsible lenders from predatory. This is the formula a trustworthy fintech bank uses to offer products and services that promote economic inclusion and health while protecting its consumers.

Interest rates are often the crux of it. The Military Lending Act (MLA) prescribes a 36% cap on interest rates nationally for all active duty military members. Industry and consumer protection groups support this cap, and many institutions adhere to it. Each state has its own usury laws, some below 36%, others above it. Cross River, chartered in New Jersey, is capped at 30% interest.

In 1980, to create marketplace parity and competition, Congress passed the Depository Institutions Deregulation and Monetary Control Act (DIDMCA). Among many other things, DIDMCA affords community banks the ability to export their home-state interest rates, enabling loans that exceed well beyond 36%. Many—including Cross River and consumer protection groups—consider such high rates to be predatory.

The Challenge

The loan structures and partnership agreements high-interest-lenders implement are unhealthy and fundamentally different than the ones responsible lenders—like Cross River and entities like it—adhere to. Predatory lenders have zero stake in the game. They cannot maintain their loans on their own balance sheets, offloading them on the secondary market so that they can initiate more high-interest loans. Instead of offering products and services that provide consumers with financial flexibility and growth, they trap consumers in endless cycles of debt.

Can regulators and legislators empower good actors while marginalizing the predatory? Can consumers be protected without cutting off their essential access to banking solutions?

The Solution?

Some have posited opting out of DIDMCA, a policy position consumer protection groups have attempted to employ. We believe such a move would have significant negative consequences for both consumer and industry. It would prohibit good actors from exporting responsible rates to consumers, many of whom are subject to state rates established decades ago, with unaccounted for market fluctuations. Consumers would thus turn to unreliable alternatives, like fee-loading unregulated entities and pawn shops, whose extremely high payments exceed even high state usury rates.

The Solution!

Cross River believes there is a better solution, one we and our partners have successfully implemented and experienced in numerous states, such as California, New Mexico, and Illinois. Legislation is written enforcing those who utilize predatory rates to maintain those loans on their own balance sheets, restricting their ability to sell said loans on the secondary market to free up space to initiate more predatory loans. Loans above the 36% threshold must include anti-evasion and predominant-economic-interest clauses. Predatory lenders, well-aware that the loans they initiate typically go into default, are pushed out of the space, leaving responsible lenders to offer dynamic consumer solutions at the cross-section of banking and technology.

The Bottom Line

Cross River and its industry partners continue to advocate for these crosscurrent solutions across the country—maintaining parity and state competitiveness, providing fertile access to credit, and setting industry standards for online lending.