AG James Previously Led Lawsuit to Invalidate True Lender Rule
New York Attorney General Letitia James today continued her efforts to block federal regulatory overreach that takes advantage of New York’s most vulnerable consumers. As part of a bipartisan coalition of 25 attorneys general, Attorney General James sent a letter to Congress, urging the nation’s federal leaders to use the Congressional Review Act (CRA) to rescind the Office of the Comptroller of the Currency’s (OCC) true lender rule. Today’s letter follows a similar letter Attorney General James led another coalition of attorneys general in sending to congressional leaders in February, also asking them to rescind the rule. The true lender rule undermines New York’s efforts to prevent predatory lenders from charging high interest rates on loans and bypasses state interest rate caps — or usury laws — already in place. The Trump-era rule enables predatory lenders to circumvent these caps through “rent-a-bank” schemes — arrangements in which heavily regulated national banks act as lenders in name only for the express purposed of enabling non-bank, payday lenders and other non-bank lenders to evade state consumer protection laws and charge consumers rates that far exceed those permissible under federal usury laws.
“This cruel and heartless rule opens the floodgates for predatory lenders to take advantage of the American people, but Congress can stop it from exacting any further harm on the country,” said Attorney General James. “Rent-a-bank schemes make a mockery of federal law and, simply, prolong the tide of exploitative and predatory loans that trap vulnerable consumers in cycles of debt. This is why I led a lawsuit to invalidate this rule earlier this year, but Congress can act now and reject this rule to stop consumers’ suffering now.”
In January 2021, Attorney General James led a coalition of attorneys general in filing a lawsuit to invalidate the OCC’s true lender rule. The suit came after Attorney General James previously led multiple coalitions, in July and August of last year, in filing lawsuits against the OCC and the Federal Deposit Insurance Corporation regarding rules that would allow banks to sell any high interest loan to a nonbank, predatory lender in an effort to evade interest rate protections. Those lawsuits remain pending.
Despite the lawsuit Attorney General James led in January, Congress can immediately resolve this issue by repealing the rule under the CRA. In today’s letter, the coalition urges Congress to pass pending House and Senate resolutions — introduced on March 26, 2021 — that use the CRA to repeal the true lender rule. If Congress does not use the CRA to rescind this rule, the state litigation to invalidate the true lender will continue, but could possibly take several months, or even years, to be resolved. While that litigation is pending, predatory small-dollar lenders may attempt to utilize rent-a-bank models to evade state usury caps and harm consumers.
Under the federal National Bank Act, national banks that are licensed and regulated by the OCC are permitted to charge interest on loans at the maximum rate permitted by their “home” state, even in states where that interest rate would violate state usury laws. The ability to preempt state usury laws in this way is a privilege granted to national banks — and only to national banks — because they are subject to extensive federal oversight and supervision.
For years, however, non-bank entities — such as payday, auto title, and installment lenders — have attempted to partner with national banks to take advantage of banks’ exemptions to state interest caps in order to offer ultra-high rates on loans in states where such loans are forbidden. Much to the dismay of non-bank lenders and their national bank partners, courts in New York and elsewhere have examined these lending relationships with exacting scrutiny and concluded that — because the national bank is not the “true lender” of the loan — state usury caps apply to the non-bank lenders.
But, the OCC’s true lender rule would prevent courts from intervening if a national bank is either named as the lender on loan documents or if the bank initially “funds” the loan. Further, the rule would allow the bank to instantly sell the loan and never take any meaningful risk on it. This rigid, formalist approach will provide an advantage to only banks and predatory lenders, and will do so at the expense of hardworking and unsuspecting consumers. Moreover, the Trump-era rule represents a stark departure from decades of OCC policy admonishing national banks from entering into these sham rent-a-bank arrangements.
Joining Attorney General James in sending this letter to Congress are the attorneys general of Arkansas, California, Colorado, Connecticut, Hawaii, Illinois, Iowa, Maine, Maryland, Massachusetts, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, Oregon, Pennsylvania, Rhode Island, South Dakota, Vermont, Virginia, Wisconsin, and the District of Columbia.