The rule allowing predatory loans from fake lenders must go now

In an era where bipartisan agreement is rare, last month, three Republicans voted with all Senate Democrats on a resolution under the Congressional Review Act (CRA) to overturn a rule finalized last year by the Office of the Comptroller of the Currency (OCC) that protects predatory lenders that evade state interest rate laws. The House of Representatives should follow suit and do so quickly; the rule is doing active harm to small businesses, veterans and consumers who are facing 200 percent APR loans that are illegal in nearly every state.

The OCC’s so-called true lender rule allows nonbank lenders to disguise their loans as bank loans — exempt from state rate caps and able to charge sky-high interest rates without limit — merely by finding a rogue bank to list as the lender. Payday lenders first tried these “rent-a-bank schemes” two decades ago. But courts, relying on centuries of anti-evasion law, looked at the facts and followed the money to find the “true lender” that was running and profiting from the loan program. The OCC rule overturns the true lender doctrine and prevents courts from looking past the fake lender listed in the fine print.

The fake lender rule is being used right now to defend destructive loans. Restaurant owners that are fighting a 268 percent APR loan secured by property now in foreclosure are being met with the argument that the rule permits that rate despite New Jersey’s 30 percent criminal usury law. 

Another nonbank lender recently invoked the rule to defend a 160 percent APR loan to a disabled veteran in California, where the legal rate is 24 percent. The lender argued that the fake lender rule was “consistent with” a discredited, older decision that allowed a payday lender that owned a 95 percent share of a loan to evade state law since a bank with an insignificant role was identified as the lender.

The “fake lender” rule is emboldening a growing wave of rent-a-bank schemes. Several payday lenders are openly offering installment loans in the thousands of dollars at and exceeding 200 percent APR — a rate prohibited in 42 states. These predatory lenders target the financially vulnerable and communities of color and trap consumers in unaffordable debt. Rent-a-bank lenders are even flouting voter-approved rate caps — which explains why the Republican attorneys general of Arkansas, Nebraska and South Dakota support overturning the rule.

A CRA vote would eliminate the harm from the fake lender rule immediately. Small businesses, veterans and consumers trying to recover from the COVID-19 economic crisis cannot wait years for an uncertain rulemaking by the OCC. This urgency explains why a large, bipartisan coalition of state attorneys general, state regulators, state legislators, legal scholars, faith groups, credit unions and nearly 400 consumer, veterans, small business, disability rights, human rights, labor and civil rights groups support the CRA resolution.

The CRA, which prohibits judicial review, gives the OCC more protection from litigation than regular rulemaking, which could be challenged as arbitrary and capricious. A CRA vote would not prevent the OCC from revisiting the subject of the rule; the Trump administration reissued rules after Obama administration rules were rescinded. But a benefit of the CRA is that it prevents a “substantially the same” rule that protects state law evasions by predatory lenders.

Responsible fintech-bank partnerships that are not designed to evade the law do not need the OCC’s crude rule. The vast majority of these partnerships are not even covered by the rule, which does not apply to state-chartered banks. Sen. Cynthia Lummis (R-Wyo.), a founder of the U.S. Senate Financial Innovation Caucus, voted for the CRA, explaining that the rule creates an unlevel playing field that disadvantages state banks. Caucus cofounder Sen. Kyrsten Sinema (D-Ariz.) also voted for the CRA.

Proponents of the rule also conflate it with the OCC’s so-called “valid-when-made” rule. Overturning the former has no impact on the latter or on the question of what interest rate laws apply to debt buyers or other non bank assignees of actual bank loans (though the valid-when-made rule should also be overturned).

The Pollyannaish claims made to defend the fake lender rule pale in the face of the undeniable explosion of predatory rent-a-bank schemes and use of the OCC rule to defend them. States have had the power to limit interest rates to protect their residents since the founding of this country, but that power is now seriously at risk. Defending the power of states to enforce their own laws is not a partisan issue. The OCC fake lender rule must go. Now.

Lauren Saunders is the associate director of the National Consumer Law Center focusing on safe banking.