Banking regulator’s True Lender Rule undermines bank regulatory protections and protects predatory lending
A recent to reign by the Office of the Comptroller of the Currency (OCC), a federal banking regulator, threatens to upend rights and responsibilities between banks and their non-bank lending partners, displacing regulators from states and subjecting consumers to predatory lending . The US Senate has already, with a bipartisan vote, adopted legislation to overturn the rule, using a mechanism called the Congressional Review Act (CRA). The House of Representatives is planned to vote on the measure this week 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. Some payday lenders have 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 which effectively prevented consumers from being able to challenge these arrangements in court. Finally, state regulators and attorneys general have joined federal regulators to terminate these arrangements. They won using legal precedent, dating from 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 true lender was not a bank with pre-emptive rights. At this time the 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.
During the last years, lenders again sought to use these banking partnerships to avoid regulation and state laws. Last October, the The OCC reversed its previous position by issuing a rule which seeks to replace this long-standing law by asserting both that the OCC has the power to override the court’s true lender doctrine and by enacting 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 supervision requirements of banks.
Defenders of the rule claim 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 itself willing to take legal action against banks that do not exercise proper control.” The author proposes a link to two coercive actions, both of which were taken almost two decades ago. However, there is several high-cost bank rental programs that the OCC – and the Federal Deposit Insurance Corporation (FDIC) – have allowed to operate in recent years while ignoring repeated pleas from Congress, government officials and consumer advocates to enforce the law.
During recent congressional hearing, the former acting controller who issued the rule was unable to report any enforcement action when requested by Senator Elizabeth Warren (D-Mass.). The senator referred to the experience of a married couple who had a small distributor of restaurant 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. Non-bank business lenders arranged the loan, set the terms and collected the payments even though the name of 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 restaurateur in New York faces foreclosure due to a 268% annual interest loan from World Business Lenders, which again uses the name Axos Bank.
The FDIC and OCC also made it clear what they considered an acceptable loan by jointly filing an amicus brief defending a rental bank. $ 550,000 loan at 120% interest to a small business in Colorado, where the state has a tariff cap much lower than this.
More generally, the OCC has a long history of pre-empting state consumer protection law to the detriment of consumers and the economy, more particularly in the before the 2008 financial crisis. In recognition of this prejudice, the Wall Street Reform Act of 2010 “Reduced its power to preempt state laws, particularly with respect to non-bank entities …”
Another claim by defenders of the rule, made recently on the Floor of the US Senate, is that the banks in these partnerships should “assess a borrower’s repayment capacity before granting the loan” or “face serious consequences from their regulator…”. The existence of around ten ongoing partnerships with loans close to or far exceeding triple-digit interest rates indicates that unaffordable loans are made 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.
Extensive research from California, SEC filings, and elsewhere show that consumers are more likely to default on high interest loans. High interest lenders are often target black and latino communities with products that attract people 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 contempt for the ability of borrowers to repay”.
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 have continued on the rule, which was hastily offers and approved in just 100 days. the District of Columbia Attorney General sued non-bank lenders trapping constituents in debt through bank lease 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 bipartite 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 announced his support for the CRA’s resolution to repeal the rule, noting it harms 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 has not received 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.