California Attorney General Xavier Becerra joined a multistate federal lawsuit filed Tuesday challenging the Office of the Comptroller of the Currency’s “true lender rule,” alleging the rule facilitates predatory lending by allowing non-bank entities to evade state limits on consumer loan interest rates.
In the 72-page complaint, filed in the U.S. District Court for the Southern District of New York, attorneys general for seven states and the District of Columbia claim the OCC’s rule allows entities like payday lenders and auto-title lenders to enter into sham “rent-a-bank” agreements with national banks that are shielded from state interest rate caps.
To prevent these arrangements, the complaint states, courts have traditionally relied on the “true lender doctrine,” which recognizes the true lender of the loan as the entity that bears the risk and has a financial stake in it. Under the doctrine, if a national bank is the lender in name only and a non-bank entity is the true lender, the loan is subjected to state interest rate caps.
The new OCC rule, which became effective Dec. 29, 2020, instead recognizes a national bank as the true lender if its name appears on the loan documents or if it held the funds before they were sent to the borrower, even if it only held them briefly.
In the rent-a-bank schemes that the new rule allegedly facilitates, non-bank entities try to avoid state interest rate caps by enlisting a national bank to put its name on loan documents or initially fund a loan, the attorneys general allege in the complaint. The national bank then acts as a pass-through, the suit claims, by transferring funds to borrowers and then “selling” the loan back to the non-bank lender.
Although the national bank never has a financial stake in a loan, the complaint alleges, borrowers are stuck with “exorbitant” interest rates that are illegal under state law. California, for example, caps interest rates at 36 percent on consumer loans under $10,000. Under the new OCC rule, interest rates on such loans could be hiked to 100 percent or higher, the suit claims.
“The OCC wants to permit unscrupulous lenders to pile debt on people who are often already struggling financially, forcing borrowers into a debt spiral they can’t work their way out of. We’re taking the OCC to court to stop the exploitation of struggling Californians,” Becerra said in a statement. “A bank isn’t a true lender unless it has skin in the game. These illegal rent-a-bank schemes hurt borrowers as well as lenders who play by the rules.”
The OCC could not be immediately reached for comment on the lawsuit.
The attorneys general claim that in issuing the rule the OCC failed to consider the harm to consumers or to support the rule with facts or analysis in violation of the Administrative Procedure Act. They also claim the rule violates the Dodd-Frank Act, which outlines actions the OCC must take before issuing rules that preempt state consumer financial laws.
The suit asks the court to grant declaratory relief and to hold unlawful and set aside the new rule.
The case is New York v. Office of the Comptroller of the Currency, case number 1:21-cv-00057, in the U.S. District Court for the Southern District of New York.
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