SACRAMENTO - The California Department of Justice joined a coalition of 25 attorneys general today in a letter asking Congress to invalidate a rule by the Office of the Comptroller of the Currency (OCC) that encourages predatory lending by non-bank lenders. The OCC regulates national banks, which are generally not bound by state interest-rate caps. The “True Lender Rule,” issued in October 2020, allows payday lenders, auto-title lenders, and other non-bank entities to evade state limits on loan interest rates through phony "rent-a-bank" partnerships with national banks. The California Department of Justice has a pending multistate lawsuit challenging the OCC's “True Lender Rule,” but today’s letter urges Congress to use its powers under the Congressional Review Act to rescind the rule as the most efficient way to prevent predatory lending abuse and consumer harm.
In rent-a-bank schemes, a non-bank lender seeks to circumvent state interest-rate caps by enlisting a bank to put its name on loan documents or initially fund a loan. The bank acts as a mere pass-through, transferring funds to borrowers as instructed by the non-bank lender and then "selling" the loan back to the non-bank lender. Non-bank lenders engage in these rent-a-bank schemes to bypass state interest-rate caps and levy exorbitant interest rates on borrowers in violation of state laws.
To detect and prevent these sham lending arrangements, courts have traditionally relied on the “true lender doctrine,” which holds that the true lender of a loan is the entity that bears the risk and has a financial stake in it. If a 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 True Lender Rule dispenses with the true lender doctrine and instead recognizes 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. While California has a 36 percent interest-rate cap on consumer loans under $10,000, for example, the OCC's True Lender Rule enables rent-a-bank schemes that hike interest rates to 100 percent or higher.
The letter to Congress states that the OCC's True Lender Rule "would sanction high-cost lending schemes designed to evade" state interest-rate caps and "would be exploited by lenders seeking to circumvent these state interest-rate caps and invite, indeed welcome, predatory consumer-lending partnerships between banks and lightly regulated non-depository lenders." The letter urges Congress to rescind the OCC's True Lender Rule and safeguard states' rights "to protect their citizens from financial abuse.”
In signing the letter, the California Department of Justice joins attorneys general from Illinois, Arkansas, Colorado, Connecticut, Hawaii, Iowa, Maine, Maryland, Massachusetts, Michigan, Minnesota, Nebraska, Nevada, New Jersey, New York, North Carolina, Oregon, Pennsylvania, Rhode Island, South Dakota, Vermont, Virginia, Wisconsin, and the District of Columbia.
A copy of the letter is available here.