Opinion: Congress should reject the false “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 monitor banks, even found a way to reduce State credit restrictions through a rule it issued in October 2020: the “real lender, Which allowed predatory lenders to escape state interest rate caps by partnering with foreign banks.

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 make a decision proposal by Sens. Chris Van Hollen (D-Md.) And Sherrod Brown (D-Ohio) to overturn the falsely named OCC rule. If senators vote in the interest of their state and not of their party, it will go smoothly, as it should.

More than 40 states have adopted usury laws that cap interest rates, typically at or below 36% per annum. Their ranks include dark red states such as Texas and South Carolina, as well as dark blue California, which after years of allowing predatory rates by companies providing unsecured loans, ultimately set a 36% cap on loans of $ 2,500 to $ 10,000 in 2019. (Unfortunately, payday loans up to $ 300 remain exempt in this state.)

The cap rates were not aimed at conventional banks, which are generally not players in the ultra-high interest rate lending game (bank regulators, including the OCC, frown on these loans). Instead, they targeted “non-bank lenders” such as Curo and Business lenders who offer loans with 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 with no interest rate caps – Utah, for example – to continue selling loans. with interest rates well above 100% per annum for borrowers nationwide. Under these “rent-a-bank” arrangements, the non-bank lender will do the marketing (often online), attract customers and approve the loans, which it will send to its banking partner for financing, and then the bank will sell the loans to the non-bank lender, harvesting 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 draws for money.

The question here is who the lender really is. According to the long-standing “valid when made” 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 comply with the rules of the other state. . But consumer advocates convincingly argue that bank rental programs are the kind of escape the courts have since rejected. over a century. The bank is not the real lender in these transactions, it is the non-bank lender.

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 all interactions with the borrower, virtually assume all the risks, reap 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” dead letter. “.

Proponents of the rule argue that the OCC needed to clarify the true lender rule due to a court of appeal decision in New York that seemed to weaken the “validate when made” 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 programs, which, given the unscrupulous history of the OCC on this matter, is not at all reassuring.

In a Senate Banking Committee hearing on the rule, Senator Patrick J. Toomey (R-Pa.) Also defended lenders who escaped 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 legislators in every state with laws. on wear.

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 the 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 interest rate caps the OCC rule would allow non-bank lenders to escape. Congress should reject the rule and let states protect the interests of borrowers who live within their borders.

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