Attorney General Bonta: Predatory Lending and Illegal Rent-a-Bank Schemes Have No Place in Our Financial System

OAKLAND – California Attorney General Rob Bonta joined 20 attorneys general in urging the Federal Deposit Insurance Corporation, the Federal Reserve, and the Office of the Comptroller of the Currency (collectively, “federal bank regulators”) to explicitly disavow rent-a-bank schemes in their forthcoming guidance for banks on risk management when engaging with third parties. Predatory lenders use rent-a-bank schemes in order to attempt to circumvent state laws and charge borrowers interest rates that exceed state limits. In California, for example, where interest rates are capped at 36% for consumer loans between $2,500 and $10,000, payday lenders have attempted to partner with banks to rent out the bank charter and charge an interest rate of 100% or higher. To discourage the proliferation of this predatory activity, federal bank regulators should express their strong disapproval of rent-a-bank schemes.

“Predatory lending and illegal rent-a-bank schemes have no place in our financial system,” said Attorney General Bonta. “I’m joining 20 attorneys general in calling on federal bank regulators to take a stand against this exploitative practice and protect struggling borrowers from being saddled with insurmountable debt.”

In rent-a-bank schemes, a non-bank lender seeks to avoid state interest-rate caps by enlisting a bank that is not subject to those rate caps to act as the "lender" for its loans in name only. In these schemes, the bank acts as a mere pass-through, "selling" the loan back to the non-bank lender, and never has a true financial stake in the loan. Predatory lenders use these schemes to charge borrowers exorbitant interest rates that are illegal under California law. 

While federal bank regulators have previously indicated their disapproval of this evasive tactic, under the Trump Administration, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency (OCC) issued rules that facilitated rent-a-bank schemes. California is currently leading a multistate coalition in lawsuits challenging these rules as unlawful under the Administrative Procedure Act and supported Congress' recent resolution revoking the OCC's "true lender" rule, which also facilitated these schemes. In the comment letter, the coalition argues that federal bank regulators' failure to disavow rent-a-bank schemes in their proposed guidance invites continued abuse by predatory lenders. The coalition strongly urges them to repudiate these schemes in their final guidance.

Attorney General Bonta joins the attorneys general of Colorado, Connecticut, Hawaii, Illinois, Iowa, Maine, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, New Mexico, New York, North Carolina, Oregon, Pennsylvania, Virginia, Washington, the District of Columbia, and the state financial regulators of Colorado, Hawaii, Maine, and Illinois in filing the comment letter.

A copy of the letter can be found here.