Attorney General Becerra Challenges FDIC Rule that Allows Predatory Lenders to Bypass State Interest-Rate Caps

SACRAMENTO – California Attorney General Xavier Becerra today, leading a coalition of eight attorneys general, filed a lawsuit challenging the Federal Deposit Insurance Corporation’s (FDIC) final rule that creates a loophole allowing predatory lenders to evade state laws that forbid excessive interest-rate charges. These caps on interest rates play a critical role in regulating payday loans and other high-cost lending throughout the state. Under existing federal law, federally insured state-chartered banks are exempt from state interest-rate caps. The FDIC’s final rule extends these exemptions to any non-bank lender that buys loans originated by an exempt bank. The final rule virtually invites predatory lenders to “rent a bank” — use a federally insured bank — to do its dirty work of issuing loans with interest rates that exceed state law which the bank then transfers to the predatory lender. The complicit bank washes its hands of the usurious loan, the predatory lender escapes the reach of state laws prohibiting such loans, and consumers pay the price.

“California adopted interest-rate caps so that consumers would be protected against unconscionable predatory lending. This FDIC rule allows predatory lenders to skirt these critical state laws and trap borrowers in insurmountable debt,” said Attorney General Becerra. “Preying on consumers in financial distress is bad enough. But giving these predatory lenders the key to evade the law meant to protect consumers is despicable. We’re taking the FDIC to court to stop this unlawful rule before it devastates American families struggling through financial distress.”

States have long played a critical role in protecting their residents from high-cost loans. While federal law provides a carve out from state interest-rate caps for federally-regulated banks, state law continues to protect residents from predatory lending by non-banks such as payday, auto title, and installment lenders. The FDIC’s final rule extends the Federal Deposit Insurance Act exemption applicable to federally insured state-chartered banks to these non-bank debt buyers, a dramatic expansion that facilitates lenders' deliberate efforts to evade state laws that are designed to protect residents from predatory lending.

In the lawsuit, the coalition argues that the FDIC’s final rule conflicts with the Federal Deposit Insurance Act, exceeds the FDIC’s statutory authority and violates the Administrative Procedure Act. Additionally, the lawsuit asserts that the FDIC failed to consider and address the negative effect that its final rule has on consumer financial protections by facilitating predatory “rent-a-bank” schemes.

Attorney General Becerra is committed to upholding consumer protections, which is why he supported California’s adoption of legislation that limits interest rates on loans between $2,500 and $10,000 to 36 percent. Last month, Attorney General Becerra filed a lawsuit against the federal Office of the Comptroller of the Currency (OCC) challenging a near-identical rule that exempts buyers of high-interest loans originated by a federally chartered bank from state interest-rate caps. Previously, in February 2020, Attorney General Becerra submitted a comment letter to the FDIC opposing its proposal to preempt state usury laws that regulate payday loans and other high-cost lending. In January 2020, Attorney General Becerra submitted a comment letter opposing the OCC’s proposal to exempt payday and other high-cost lenders from state usury laws. In October 2017, Attorney General Becerra issued a statement in support of the federal Consumer Financial Protection Bureau’s (CFPB) Payday Lending rule. In March 2019, he submitted a comment letter opposing a proposal by the CFPB to formally delay the implementation of its 2017 Payday Rule. Additionally, Attorney General Becerra filed an amicus brief in support of the consumer-plaintiff in De La Torre v. Cash Call successfully arguing that the interest rate of the loan may render it unconscionable under California law.

Joining Attorney General Becerra in filing the lawsuit are the attorneys general of Illinois, Massachusetts, Minnesota, New Jersey, New York, North Carolina, and the District of Columbia

A copy of the complaint can be found here.