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SACRAMENTO – California Attorney General Xavier Becerra today joined a multistate lawsuit against the Office of the Comptroller of the Currency (OCC) challenging its “True Lender Rule.” The OCC’s rule facilitates predatory lending by allowing payday lenders, auto-title lenders and other non-bank entities to evade state limits on loan interest rates through sham "rent-a-bank" arrangements with national banks. California limits interest rates to 36 percent on consumer loans under $10,000. To circumvent California law, the predatory non-bank lenders “partner” with national banks that are shielded from state rate caps. The OCC’s True Lender Rule enables rent-a-bank schemes that often hike interest rates on borrowers to 100 percent or higher.
“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,” said Attorney General Becerra. “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. We’re fighting to uphold California laws that prohibit these nefarious schemes.”
In rent-a-bank schemes, a non-bank lender seeks to avoid state interest-rate caps by enlisting a national bank to put its name on loan documents or initially fund a loan. In these schemes, the bank acts a mere pass-through, transferring funds to borrowers as instructed by the non-bank and then "selling" the loan back to the non-bank lender. The national bank never has a true financial stake in the loan, but this loophole leaves borrowers with exorbitant interest rates that are illegal under California law.
To detect and prevent these sham lending arrangements, 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. If a national bank is the lender in name only and the non-bank is the true lender, the true lender doctrine subjects the loan to state interest-rate caps. The OCC’s alternative True Lender Rule, which becomes effective on December 29, would dispense with the true lender doctrine and instead recognize a national bank as the “true lender” if its name appears on the loan documents or if it held the funds, however briefly, before they were sent to the borrower.
In their lawsuit, the attorneys general argue the OCC’s True Lender Rule is illegal because:
• The OCC’s standard for determining the “true lender” of a loan makes little sense as loans can be funded by one entity while another is named as the lender in loan documents;
• The OCC has failed to consider the harm to consumers this rule would create;
• The OCC has failed to set forth any factual findings or reasoned analysis to support its rule;
• The OCC has violated the federal Dodd-Frank Act, which outlines multiple actions the OCC must take before issuing rules that preempt state consumer financial laws; and
• The OCC has abandoned its longstanding policy of preventing rent-a-bank arrangements without explaining the reason for the policy reversal.
Attorney General Becerra has steadfastly protected borrowers from predatory loans and rent-a-bank schemes. In July 2020, Attorney General Becerra led a coalition of attorneys general in suing the OCC over its Non-bank Interest Rule, which allows any entity that buys a loan from a national bank to become exempt from state interest-rate caps. If the Non-bank Interest Rule takes effect, it will work in tandem with the OCC’s True Lender Rule to undermine states’ ability to protect consumers from predatory lending. In August 2020, Attorney General Becerra led a coalition of attorneys general in a lawsuit challenging a similar rule from the Federal Deposit Insurance Corporation (FDIC) related to state-chartered banks. In October 2017, Attorney General Becerra issued a statement supporting the federal Consumer Financial Protection Bureau’s (CFPB) Payday Lending Rule.
In filing the lawsuit, Attorney General Becerra joins the attorneys general of New York, Colorado, Massachusetts, Minnesota, New Jersey, North Carolina, and the District of Columbia.
A copy of the complaint can be found here.