Opinion: Congress should reject bogus ‘real lender’ rule


President Trump has pushed his administration to scrap the rules rather than pass them, and many of his regulators have taken this to heart – especially those who oversee the financial industry. The Office of the Comptroller of the Currency, which helps oversee banks, even found a way to reduce State lending restrictions through a rule released in October 2020: the “real lender” regulation, which allowed predatory lenders to escape government interest rate caps by partnering with banks out of state.

Congress can overturn this rule, but at least one chamber must begin the process by passing a disapproval resolution by May 21. This week, the Senate could accept a proposal from Sen. Chris Van Hollen (D-Md.) And Sherrod Brown (D-Ohio) to overturn the OCC’s dishonest rule. If senators vote in the best interests of their state and not of their party, it will go smoothly, as it should.

More than 40 states have passed usury laws that cap interest rates, typically less than or equal to 36% per year. Their ranks include deep red states like Texas and South Carolina, as well as deep blue California, which, after years of allowing predatory rates by companies that make unsecured loans, have eventually capped loans of $ 2,500 to $ 10,000 at 36% in 2019 (unfortunately). , payday loans up to $ 300 remain exempt in this state.)

The rate caps were not aimed at conventional banks, which are generally not players in the very high interest rate lending game (bank regulators, including the OCC, frown on these loans). Instead, they have targeted “non-bank lenders” such as Curo and World Business Lenders who offer loans at triple-digit interest rates to people with poor credit who do not have access to conventional financing.

In response to these state rules, however, some non-bank lenders have partnered with nationally chartered banks in the few remaining states without interest rate caps – Utah, for example – to continue selling loans with interest rates well above 100% per annum for borrowers nationwide. Under these ‘bank lease’ arrangements, the non-bank lender will do the marketing (often online), attract customers, and approve the loans, which they send to their partner bank for funding – then the bank will sell the loans. ready. to the non-bank lender, taking a profit and wiping their hands of the transaction. The non-bank lender then collects the payments; his banking partner is little more than a safe in which he throws himself in cash.

The question here is who the lender really is. Under the long-standing “valid once done” doctrine, a loan validly made by a bank under the rules of one state can be sold to an entity in another state and still be considered valid, even if the terms of the loan do not conform to the rules of the other state. . But consumer advocates convincingly argue that bank rental schemes are the kind of escape courts have rejected for over a century. The bank is not the real lender in these transactions, the non-bank lender is.

The OCC rule goes the other way, stating that a bank becomes the true lender if its name appears on the loan documents. In a letter to congressional leaders, a coalition of consumer and civil rights groups complained that under the new rule, “the non-bank lender could control any interaction with the borrower, take virtually all the risk, reaping the vast majority of the benefits, but could ignore state laws that apply to non-bank lenders. They added: “The OCC’s final rule will leave states unable to protect their interest rate caps, leaving usury laws – in the words of Chief Justice Marshall – a” letter dead ”.

Proponents of the rule argue that the OCC needed to clarify the true lender rule due to a 2015 New York appeals court ruling that appeared to weaken the “ valid once ” doctrine, which in turn could discourage banks from granting loans. They add that the rule will make banks supervised by the OCC clearly responsible for loans issued under bank leasing systems, which, given the OCC’s history on this issue, is not expected. all reassuring.

In a Senate Banking Committee hearing on the rule, Senator Patrick J. Toomey (R-Pa.) Also defended lenders who evaded state interest rate caps, saying they helped borrowers, not exploited them. “Price controls restrict the supply of credit and make it harder for low-income consumers to access the credit they need,” Toomey said, substituting his own judgment on this issue for that of lawmakers in each state endowed with it. usury laws.

Toomey’s defense is a common rationalization to allow predatory lenders to extract triple-digit interest rates from desperate borrowers – “These people need access to credit!” But that is to say that grocery stores should be allowed to sell spoiled food because people need to eat. Access to a debt trap is not access to credit, which is why dozens of consumer groups categorically reject the argument that the government should tolerate predatory loans because some people might be desperate enough to accept them.

State lawmakers and voters across the country have approved the interest rate caps the OCC rule would allow non-bank lenders to evade. Congress should reject the rule and let states safeguard the interests of borrowers who live within their borders.

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