Proposed Federal Banking Rule Would Unleash Predatory Lending In All 50 States

By: Rachel Weintraub, CFA Legislative Director and General Counsel & Rachel Gittleman, CFA Financial Services and Membership Outreach Manager

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The Office of the Comptroller of the Currency (OCC) has proposed a new rule that would encourage the spread of predatory loans by gutting the “true lender” doctrine that courts use to detect usury evasions, according to experts. In response, CFA joined with numerous other advocacy groups to submit comment letters earlier this month in vigorous opposition to the proposed rule.

The “true lender” doctrine is, as CFA points out in the comment letter, “an anti-evasion doctrine that allows courts to look beyond the fine print to determine which party has the predominant economic interest in the loan.” The letter continues, “by gutting this long-standing doctrine, the OCC’s proposal would eviscerate the power of state governments to independently regulate interest rate limits and would unleash predatory lending in all 50 states with horrible consequences for consumers, small businesses, and especially, communities of color.”

In their letter, CFA Legislative Director and General Counsel Rachel Weintraub and CFA Financial Services and Membership Outreach Manager Rachel Gittleman highlight four main points:

1. Interest Rates are Effective Tools to Protect Consumers from Predatory Lending

At least 45 states and the District of Columbia have rate caps on installment loans. Additionally, 16 states and the District — representing about a third of the U.S. population — enforce interest rates of 36% or less that keep all high-cost loans out of their state.

These rate caps have immense public support. As illustrated by recent ballot measures and polling data, a super-majority of Americans, across party lines, support establishing usury laws to curb predatory, high-cost lenders.

2. Rent-A-Bank Schemes Evade State Interest Rate Caps

Non-bank lenders evade these state imposed rate caps by laundering their loans through banks, which are generally exempt from usury limits. This “rent-a-bank” scheme allows banks to serve as a conduit by which the non-bank lender can evade state interest rate caps, even though the non-bank lender interfaces with the consumer and has the predominant economic interest in the loan. Loans made through rent-a-bank schemes are some of the most predatory on the market, with interest rates of 100% and higher.

Currently, there are only a few of these rogue, predatory lenders. At least seven online lenders are using five banks to offer high-cost installment loans to consumers and small businesses. However, they primarily operate online, allowing them to offer these predatory loans across the United States.

3. States have Protected Their Interest Rate Caps with the “True Lender” Doctrine

Already, state regulators, state attorneys general, and consumers have had success in the courts by using the “true lender” doctrine to argue that the true lender of a loan is the party with the predominant economic interest in the loan. The OCC proposal would eliminate this doctrine, stripping protections away from consumers and prohibiting courts from looking past the fine print of loan paperwork to what is true in these agreements.

Instead, the new proposal would dictate that, by merely putting the bank’s name on the paperwork, the bank becomes the true lender. This would enable the non-bank lender to control all interaction with the borrower, take on virtually all of the risk, reap the vast majority of the profits, and still, the bank would be considered the lender as long as, as of the date of origination, the bank “is named as the lender in the loan agreement.”

4. Predatory Lenders Target Communities of Color and Leave Borrowers Worse Off

Some argue that these rent-a-bank relationships increase access to affordable credit and financial inclusion of underserved communities and communities of color; but in fact, this proposal does the opposite.

“The harms of predatory loans have been more thoroughly documented in recent years than ever before, and it has become clear that these loans are structured to create long-term debt traps. They are marketed to borrowers as short-term fixes to cover unexpected emergencies, but the products’ structure and high-cost result in the borrower taking out more loans to pay off the original loan…These loans result in long-lasting financial harm for consumers, especially consumers of color, stripping them of hard-earned wealth, exacerbating the racial wealth gap, and leading to further financial exclusion,” Weintraub and Gittleman write.

“[This] proposed rule would take away a critical enforcement tool against usury evasions, leaving states with no ability to protect their interest rate caps and paving the way for these exploitive and predatory rent-a-bank schemes. Without this significant enforcement tool, rent-a-bank schemes will become far more prevalent, eviscerating state interest rate caps, and drastically limiting states’ authority to protect consumers from predatory lending,” stated Weintraub and Gittleman.

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