Banking regulator’s True Lender Rule undermines bank regulatory protections and protects predatory lending


A recent rule from the Office of the Comptroller of the Currency (OCC), a federal banking regulator, threatens to overturn the rights and responsibilities between banks and their non-bank lending partners, displacing regulators from states and subjecting consumers to predatory loans. The US Senate has already, with a bipartisan vote, passed legislation to repeal the rule, using a mechanism called the Congressional Review Act (CRA). The House of Representatives is expected to vote this week on the measure to do the same, which would then send the legislation to the president’s office for final approval. The adoption of this measure is necessary to protect consumers and preserve a long-standing precedent for states to enforce their laws.

Banks regularly enter into partnerships with non-bank entities to carry out their operations and provide services to customers. However, some non-bank lenders have attempted to use banks as vehicles to evade state laws, as banks are generally exempt from certain state laws by federal pre-emption. Some non-bank institutions added a bank’s name to their loan documents and then claimed that they were entitled to the bank’s pre-emptive rights over state regulation and consumer protection laws, including including wear limits.

This peaked in the early 2000s, when some states decided to ban payday loans at 400% interest rates. Some payday lenders responded by making deals where they paid a small fee to a few banks to add their names to loan documents and demanded pre-emption of these state laws. They combined this with mandatory arbitration clauses that effectively prevented consumers from being able to challenge these arrangements in court. Eventually, state regulators and attorneys general joined with federal regulators in ending these agreements. They won by using legal precedent, dating back to at least 1825, that courts review transactions to determine who was the true lender – the party with the predominant economic interest – and that state laws apply to the loan if the real lender was not a bank with right of first refusal. At that time, the OCC was adamant that pre-emption rights were not something that banks could lease to non-bank entities for a fee. This put an end to these so-called “rent-a-bank” programs and state laws were once again enforced against these non-bank lenders.

In recent years, lenders have again sought to use these banking partnerships to avoid regulation and state laws. Last October, the OCC reversed its previous position by issuing a rule that seeks to replace this long-standing law by asserting both that the OCC has the power to override the court’s real lender doctrine and by adopting a standard that would specifically grant pre-emptive rights to non-bank lenders if they simply put the name of the partner bank on the loan document.

This rule would upset the current banking regulation system without a coherent alternative. It would give non-bank entities blanket pre-emption without the licensing or supervisory requirements of banks.

Defenders of the rule claim that the OCC will prevent banks from allowing predatory lending. The results show the opposite. An editorial defending the OCC states that “the OCC has shown a willingness to take enforcement action against banks that do not exercise proper control.” The author provides a link to two enforcement actions, both of which were taken almost two decades ago. However, the OCC – and the Federal Deposit Insurance Corporation (FDIC) – have licensed the operation in recent years ignoring repeated requests from Congress, state officials, and consumer advocates. to enforce the law.

In a recent congressional hearing, the former acting comptroller who issued the rule was unable to signal any enforcement action when requested by Senator Elizabeth Warren (D-Mass.). The senator referred to the experience of a married couple who owned a small distributor of catering supplies in Massachusetts. These are immigrants, with limited knowledge of English, who took out a loan with an annual interest rate of 92%, well above the Massachusetts usury limit of 20% that applies to lenders. government non-bank. The non-bank World Business Lenders arranged the loan, set the terms and collected the payments even though the name Axos Bank, a bank supervised by the OCC, was on the loan document. The couple had to sell their house to get out of the loan.

Likewise, a restaurant owner in New York is threatened with foreclosure following a 268% annual interest loan from World Business Lenders, which again uses the name Axos Bank.

The FDIC and OCC have also clarified what they consider an acceptable loan by jointly filing an amicus brief defending a $ 550,000 120% interest bank rental loan to a small business in Colorado, where the state has a much lower cap rate than this.

More generally, the OCC has a long history of pre-empting the State’s consumer protection law to the detriment of consumers and the economy, particularly in the run-up to the 2008 financial crisis. In recognition of this damage , the Wall Street Reform Act of 2010 “restricted its power to pre-empt state laws, particularly with respect to non-bank entities…”.

Another assertion by advocates of the rule, made recently in the US Senate, is that banks in such partnerships should “assess a borrower’s repayment capacity before granting the loan” or “face serious consequences of the loan. from their regulatory body… ”. The existence of a dozen partnerships in progress with loans close to or greatly exceeding triple-digit interest rates indicates that unaffordable loans are granted without repercussions. So the evidence does not support that federal regulators will prevent an explosion of predatory schemes like these if the OCC rule remains in place.

Much research in California, SEC records and elsewhere shows that consumers are more likely to default on high interest loans. High interest lenders often target Black and Latino communities with products that drag people into financial quicksand. These loans are not taken responsibly, as a credit union in the deep south analyzed bank rental loans taken out by their members and documented “a clear disregard for the repayment capacity of borrowers.”

Almost all states have an interest rate cap. These limits are seriously hampered by the OCC rule, so it’s no surprise that state officials are pushing back. Eight state attorneys general sued the rule, which was hastily proposed and approved in just 100 days. The District of Columbia attorney general has sued non-bank lenders who trap constituents in debt through bank rental loans. He alleged that OppFi and Elevate “deceptively marketed high-cost loans” that they made to thousands of DC residents.

A letter calling on Congress to repeal the rule was signed by a bipartisan group of 25 state attorneys general. The Conference of State Bank Supervisors (CSBS), which represents Republican and Democratic officials, sent the same message to Congress, saying that “the OCC should not erode the rights and protections of the state’s consumers. , especially when it refuses to go through the process mandated by Congress to pre-empt those protections. “

The Biden administration has announced its support for the CRA’s resolution to repeal the rule, noting its damage to financial regulation and consumers. The House of Representatives now has the option to help protect consumers by approving the measure and sending it to the president’s office for signature.

The author did not receive financial support from any company or person for this article or from any company or person with a financial or political interest in this article. They are not currently an officer, director or board member of any organization interested in this article.

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