Attorney General Becerra Condemns Proposal That Would Allow Predatory Lenders to Exploit Consumers through Deceitful “Rent-a-Bank” Schemes

Becerra submits letters to FDIC, Congress on the need to prevent predatory lending practices

SACRAMENTO – California Attorney General Xavier Becerra, co-leading a bipartisan coalition of attorneys general with Illinois Attorney General Kwame Raoul and New York Attorney General Letitia James, submitted a comment letter today opposing a proposal by the Federal Deposit Insurance Corporation (FDIC) to preempt state usury laws that regulate payday and other high-cost lending. Usury laws prevent predatory lenders from taking advantage of consumers by charging high interest rates on loans. California recently enacted one such law capping interest rates for loans under $10,000. The FDIC’s proposed regulations would enable predatory lenders to circumvent state usury laws through “rent-a-bank” schemes, in which banks act as lenders in name only, passing along their state law exemptions to non-bank payday lenders. These arrangements would allow lenders to charge consumers rates that far exceed the rates permissible under California’s new law, which became effective on January 1, 2020.  
 
“The FDIC’s proposed 'rent-a-bank' rule would open the floodgates to exploitative loans that trap modest income borrowers in a never-ending cycle of debt,” said Attorney General Becerra. “Inexcusable is the only way to describe the FDIC’s utter lack of concern for vulnerable communities targeted by predatory lenders. We recently adopted new rate caps in California to protect consumers. The federal government should be looking to do the same – not creating loopholes that benefit shady actors.”
 
States have historically played a critical role in protecting consumers from predatory lending, using rate caps to prevent the issuance of unaffordable, high-cost loans. While federal law provides a carve out from state law 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 new regulations proposed by the FDIC would extend the Federal Deposit Insurance Act exemption for federally regulated banks to these non-bank debt buyers, a sharp reversal in policy that deliberately evades state laws targeting predatory lending.
 
Under California’s newly adopted law, supported by Attorney General Becerra, interest rates on loans of no more than $10,000 cannot exceed 36 percent. At least three non-bank entities with high-cost lending operations have already indicated that they plan to pursue rent-a-bank arrangements to circumvent California law.
 
In the comment letter, the multistate coalition argues that the FDIC’s attempt to extend preemption to non-banks conflicts with the Federal Deposit Insurance Act, exceeds the FDIC’s statutory authority, and violates the Administrative Procedure Act. 

Today Attorney General Becerra also delivered a letter to Congress for the U.S. House Committee on Financial Services’ hearing on California law and rent-a-bank schemes. “I appreciate the opportunity to share information on what the state of California has done to combat the problem as well as on the challenges that lie ahead as unscrupulous lenders attempt to evade the consumer protections offered by state usury law,” said Attorney General Becerra in the letter. Attorney General Becerra stresses that exploitative lending practices have a devastating impact on working families already facing financial distress and urges Congress to reign in predatory lending and prevent federal regulators from opening up loopholes that allow lenders to evade California law.

On January 22, 2020, Attorney General Becerra submitted a comment letter to the Office of the Comptroller of the Currency denouncing a similar proposal to preempt state usury laws. 
 
Joining Attorneys General Becerra, Raoul, and James in filing the comment letter to the FDIC are the attorneys general of Colorado, Connecticut, Hawaii, Iowa, Maine, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, New Mexico, North Carolina, Oregon, Pennsylvania, Tennessee, Vermont, Virginia, Washington, Wisconsin, and the District of Columbia.
 
A copy of the comment letter can be found here.