Seven states sue regulator over ‘true lender’ rule on interest rates

Seven states sued the Office of the Comptroller of the Currency (OCC) on Tuesday to scrap a rule they claim oversteps the regulator’s authority and would allow lenders to evade state interest rate maximums.

In a complaint filed Tuesday, seven Democratic attorneys general asked the U.S. District Court-Southern District of New York to deem the OCC’s “true lender” rule illegal, echoing concerns voiced by fair lending advocates and some state regulators. 

The lawsuit is led by New York Attorney General Letitia James and includes the attorneys general of California, Colorado, Massachusetts, Minnesota, New Jersey, North Carolina and the District of Columbia.

“This rule would be a mistake at any time, but the Trump Administration’s attempts to unleash predatory lenders on unsuspecting New Yorkers in the midst of a pandemic is cruel and heartless,” James said in a statement.

Acting Comptroller Brian Brooks, a Trump appointee, finalized a rule in October meant to clarify who is the “true lender” of a loan issued to a customer through a partnership between a nationally chartered bank and a third party, typically a non-bank lender.

Such partnerships can allow a financial company to offer a customer a loan with a higher interest rate than permitted under their state’s laws by teaming up with a federally chartered bank headquartered in a state with a higher interest rate cap. 

Courts across the U.S. have ruled differently on whether the bank or third party is the true lender, which can determine whether the loan is illegal and which party is responsible for violating the law. Under the OCC rule, the true lender of the loan is the party that is either listed as the true lender or funds the loan.

The OCC argued that its approach creates a clear, uniform standard that will still hold banks accountable to federal laws it enforces.

But the seven attorneys general argue that the OCC does not have the authority to issue the rule and that the rule violates federal laws that determines when state consumer financial protection laws can be preempted.

The attorneys general also voiced concerns that the OCC rule could allow the rampant rise of “rent-a-bank” schemes, in which a financial company temporarily works with a national bank to issue a loan that would violate state interest rate caps and then assumes total control over the loan.

“Rather than stem the tide of exploitative and predatory loans that trap vulnerable consumers in cycles of debt, the Trump Administration wants to open the floodgates by sanctioning schemes that allow the financial services industry to target New Yorkers and paint a bullseye on their backs,” James said.

The OCC insisted in October that the rule would hold banks accountable for such schemes and that the agency would use its supervisory power to ensure compliance.

“As the true lender of a loan, the bank retains the compliance obligations associated with the origination of that loan, thus negating concern regarding harmful rent-a-charter arrangements,” the OCC said in October.