Banking regulator’s true lender rule undermines banks’ regulatory protections and protects against predatory lending



Recent the rule The Office of the Comptroller of the Currency (OCC), the federal banking regulator, threatens to violate the rights and obligations between banks and their non-bank lender partners, ousting government regulators and exposing consumers to predatory borrowing. The US Senate has already passed a bipartisan vote legislation to overturn the rule using a mechanism called the Congressional Review Act (CRA). House of Representatives voting scheduled this week to do the same, which will then send the law to the president’s table for final approval. The adoption of this measure is necessary to protect consumers and maintain longstanding precedents that allow states to enforce their laws.

Banks regularly enter into partnerships with non-banking organizations in carrying out their operations and providing services to clients. However, some non-bank lenders have tried to use banks as a means of circumventing state laws, as banks are generally exempted from some state laws due to the overriding action of the federal government. Some non-banks added the name of the bank to their lending documents, and then said they had the bank’s pre-emptive right over government regulation and consumer protection laws, including usury limits.

This peaked in the early 2000s, when some states banned payday loans with an interest rate of 400%. Some payday lenders responded by negotiating agreements where they paid a small commission to several banks to add their names to loan documents and demanded that these government laws be waived. They combined this with binding arbitration clauses that effectively prevented consumers from challenging those agreements in court. Finally, government regulators and attorneys general have merged with federal regulators close these agreements. They won by using legal precedent, dated at least 1825, that the courts are reviewing transactions to determine who the true lender was – the party with the predominant economic interest – and that state law applies to the loan if the true lender was not a pre-emptive bank. While The OCC has been adamant that preemptive buyouts are not something that banks can lease to non-banks for a fee.… This closed these so-called “bank lease” schemes, and state laws were again applied to these non-bank lenders.

In the olden daysHowever, lenders again tried to use these banking partnerships to avoid government regulations and laws. Last October OCC changed its previous position by issuing a rule which seeks to replace that long-standing law by arguing that the OCC has the power to override the true creditor doctrine of the court, and enacting a standard that would specifically give pre-emptive rights to non-bank lenders if they simply put the name of the partner bank on the loan document.

This rule will overturn the existing system of banking regulation with no clear alternative. It would provide non-banks with broad pre-emptive repurchase rights without the requirement of a banking institution or supervision.

Advocates for the rule argue that the OCC will prevent banks from lending predatory loans. The track record shows otherwise. One article in defense of the OCC states that “OCC has demonstrated its willingness to initiate enforcement action against banks that do not exercise adequate control.” The author gives link to two enforcement actionswhich were made nearly two decades ago. However, there is several expensive bank lease schemes that the OCC and the Federal Deposit Insurance Corporation (FDIC) have allowed operations over the past few years, ignoring repeated requests from the outside Congress, government officials, and consumer advocates to ensure compliance with the law.

During recent congressional hearings, the former acting controller who issued the rule could not point to any enforcement action when – asked Senator Elizabeth Warren (Massachusetts)… The senator referred to the experience of a married couple who owned food distributor for small restaurants in Massachusetts… These are immigrants with limited English proficiency who took out a loan at an annual interest rate of 92%, well above the 20% Massachusetts usury limit that applies to non-bank lenders in the state. World Business non-bank lenders arranged the loan, set terms and collected payments, despite the fact that the loan document listed the name of Axos Bank, a bank overseen by the OCC. The couple had to sell their house to get out of the loan.

Likewise restaurant owner in New York faces the threat of foreclosure as a result of a loan at 268% per annum from World Business Lenders, which again uses the name Axos Bank.

The FDIC and OCC also clarified what they consider acceptable lending, jointly drafting an amicus protocol to protect the rental bank. a loan of $ 550,000 at 120% per annum to a small business in Coloradowhere the state has a rate cap much lower than that.

More broadly, OCC has a long history of preempting government consumer protection laws to the detriment of consumers and the economy, especially in preparing for the 2008 financial crisis… Recognizing this harm, Wall Street Reform Act 2010 “He limited his powers to abolish state laws, especially in relation to non-banking organizations …”.

Another statement by the defenders of the rule, made recently at Paul US Senate, is that banks in these partnerships will have to “assess the borrower’s ability to repay the debt before granting a loan” or “face serious consequences from their regulator …”. The existence of about a dozen ongoing partnerships with loans with interest rates close to three-digit or much higher indicates that unavailable loans are disbursed without consequences. Thus, the data does not confirm that federal regulators will prevent such predatory schemes from exploding if OCC rules remain in place.

Abundant research from California, SEC documents, and elsewhere show that consumers are more likely to fail to default on high-interest loans. High interest lenders often target black and Hispanic communities with products that attract people financial quicksand… These loans are not properly guaranteed as the credit union in the deep south analyzed and documented the lease loans of banks taken by their members. “Blatant disregard for the ability of borrowers to repay debt.”

Almost every state has an interest rate ceiling… These restrictions are severely undermined by the OCC rule, so it’s no surprise that government officials are resisting. Eight state attorneys general have sued for the rulewho was hastily proposed as well as approved in just 100 days. IN Attorney General of the District of Columbia filed a lawsuit against non-bank lenders who are luring their voters into a debt trap with bank lease loans. He argued that OppFi and Elevate “missed the costly loans” they made to thousands of DC residents.

A letter calling on Congress to repeal the rule was signed a bipartisan group of 25 state attorneys general… The Conference of State Banking Supervisors (CSBS), representing Republican and Democratic officials, sent the same message to Congress, stating that “OCC must not undermine state consumer rights and protections, especially when it refuses to follow the process prescribed by Congress to pre-empt these protection. “

Biden administration announced its support for the CRA resolution to repeal the rule, noting its harm to financial regulation and consumers. The House of Representatives now has the ability to help protect consumers by approving the measure and sending it to the president for signature.

The author has not received financial support from any firm or person for this article, or from any firm or person with a financial or political interest in this article. They are not currently an officer, director, or board member of any organization with an interest in this article.


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