Van Hollen, Brown Push Back on Administration’s Efforts to Weaken Protections Against Predatory Lending

Today, U.S. Senator Chris Van Hollen (D-Md.), a member of the Senate Committee on Banking, Housing, and Urban Affairs, and U.S. Senator Sherrod Brown (D-Ohio), the Ranking Member of the Banking Committee, led six Senate colleagues in expressing strong opposition to the “true lender” rule proposed by the Office of the Comptroller of the Currency (OCC). In their letter to Acting Comptroller of the Currency Brian Brooks, the Senators emphasize that this proposed rule would serve as a boon to predatory lenders across the nation, harming vulnerable consumers who will face skyrocketing interest rates during an already volatile financial time. They urge the Acting Comptroller to withdraw the rule. 

The Senators note that the OCC’s proposed rule bucks the national trend toward stronger borrower protections, and would eviscerate state laws limiting interest rates. “The OCC’s proposed rule runs contrary to this trend and would gut these state laws by enabling payday and other non-bank lenders to evade state interest limits by funneling high-interest, predatory loans through national banks, which are not subject to these state laws,” they write. 

The Senators detail how predatory lenders would take advantage of the proposed rule, writing, “In these ‘rent-a-bank’ arrangements, the bank plays a nominal role as the formal lender of the loan. The non-bank lender, however, does all the work, bears all or nearly all of the economic risk, and collects most of the profit... Consumers have no direct interaction with the bank; they apply to and deal with the non-bank lender, which arranges and collects payments on the loan.” 

They point out that the OCC cracked down on these “rent-a-bank” arrangements in 2001 and 2003 under President George W. Bush’s administration, and note, “There is no reason for the OCC to now reverse its position and enable these types of abusive schemes that prey on consumers with high-interest, predatory loans.” 

The Senators go on to press that the proposed rule fails to meet the requirements laid down by Congress for overruling state consumer financial laws. In closing they write, “The OCC’s proposed true lender rule represents a disturbing return to its pre-financial crisis role in broadly applying federal preemption to undermine state consumer protection laws. For over two centuries, states have taken the lead in addressing interest rates within their borders. Now is not the time to overturn this system. We urge you to reverse course on this path, which enabled predatory lending practices and contributed to the 2008 financial crisis, and which would cause even greater financial harm to American families struggling through an even worse crisis.” 

In addition to Senators Van Hollen and Brown, the letter was signed by Senators Jack Reed (D-R.I.), Elizabeth Warren (D-Mass.), Brian Schatz (D-Hawaii), Catherine Cortez-Masto (D-Nev.), Tina Smith (D-Minn.), and Dianne Feinstein (D-Calif.). 

The full text of the letter is available here and below. 

Dear Acting Comptroller Brooks: 

We write to express our strong opposition to the “true lender” rule proposed by the Office of the Comptroller of the Currency (OCC), which would eviscerate state laws that limit the interest rates on loans and allow unregulated predatory lending across the nation. We demand that you withdraw this proposed rule. 

Currently, a supermajority of states and the District of Columbia limit the amount of interest that lenders can charge on many loans. For example, 44 states and the District of Columbia have capped the interest rate for a $500 six-month loan, and 42 states and the District of Columbia have capped the interest rate for a $2,000 two-year loan. The clear trend is toward more protections for borrowers, with new bipartisan laws capping interest rates on payday and other personal loans in Montana in 2010, South Dakota in 2017, Colorado and Ohio in 2019, and going into effect in California in 2020. 

The OCC’s proposed rule runs contrary to this trend and would gut these state laws by enabling payday and other non-bank lenders to evade state interest limits by funneling high-interest, predatory loans through national banks, which are not subject to these state laws. In these “rent-a-bank” arrangements, the bank plays a nominal role as the formal lender of the loan. The non-bank lender, however, does all the work, bears all or nearly all of the economic risk, and collects most of the profit. It markets and advertises the loan, conducts the underwriting (or licenses its underwriting software to the bank), collects payments from consumers, services the loan, and is either the assignee of or purchases the predominate economic interest in the loan. Consumers have no direct interaction with the bank; they apply to and deal with the non-bank lender, which arranges and collects payments on the loan. 

Under President George W. Bush’s administration, the OCC cracked down on rent-a-bank schemes. In 2001, the OCC issued guidance making it clear that it is an “abuse of the national bank charter” for national banks to enable non-bank lenders to make loans that violate state laws. In 2003, then OCC Comptroller John D. Hawkes, Jr. explained: We have been greatly concerned with arrangements in which national banks essentially rent out their charters to third parties who want to evade state and local consumer protection laws. The preemption privileges of national banks derive from the Constitution and are not a commodity that can be transferred for a fee to nonbank lenders. 

The OCC also brought several enforcement actions to end these arrangements. There is no reason for the OCC to now reverse its position and enable these types of abusive schemes that prey on consumers with high-interest, predatory loans.

The proposed rule is also contrary to longstanding legal precedent that considers the substance of a transaction, not its form, to determine whether state usury laws apply. Since the earliest days of this nation, high-cost lenders have attempted to evade usury laws. The Supreme Court and numerous state courts have consistently held that, to prevent evasions of usury laws, courts may look beyond the technical form of a transaction to its substance. 

In recent years, courts have closely scrutinized new non-bank arrangements with banks to determine which entity—the non-bank or the bank—is the “true lender.” To make this determination, courts consider a variety of factors to determine which entity is the de facto lender or has the predominant economic interest. In other words, the courts look at substance over form to determine whether the non-bank lender is the “true lender” and thus subject to state usury laws.

The proposed rule turns this analysis on its head, elevating form over substance. Instead of closely scrutinizing the relationship and respective economic interests of the non-bank and the bank, the proposed rule looks only at whether technical formalities have been met—namely, whether, as of the date of the origination, the bank is named as the lender in the loan agreement or funds the loan. This is no standard at all. The proposed rule is not only contrary to longstanding common law principles, but it also considers none of the relevant factors reviewed by courts and invites the very “abuse of the national charter” that the OCC previously cracked down on. 

The OCC’s proposed rule also fails to meet the requirements Congress put in place for the preemption of state consumer financial laws. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), the OCC can preempt a “state consumer financial law” by regulation, order, or determination if the Comptroller, him or herself without delegation, determines, on a “case-by-case basis,” considering the impact of a “particular” state law, that it “prevents or significantly interferes with the exercise by the national bank of its powers.” In addition, the Dodd-Frank Act requires that the Comptroller “shall first consult with the [Consumer Financial Protection Bureau] and shall take the views of the Bureau into account when making the determination.” 

The OCC has not met the statutory requirements to preempt state usury laws. The proposed rule contains no evidence or determination by the Comptroller, him or herself without delegation, that a search for the true lender and an application of state usury laws to nonbanks that are the true lender “prevents or significantly interferes with the exercise by the national bank of its powers.” Nor does the proposed rule indicate that the Comptroller has consulted with the CFPB or taken the CFPB’s views into account in making that determination. 

The OCC’s proposed true lender rule represents a disturbing return to its pre-financial crisis role in broadly applying federal preemption to undermine state consumer protection laws. For over two centuries, states have taken the lead in addressing interest rates within their borders. Now is not the time to overturn this system. We urge you to reverse course on this path, which enabled predatory lending practices and contributed to the 2008 financial crisis, and which would cause even greater financial harm to American families struggling through an even worse crisis. 

Sincerely,