AG Tish James: New Federal Rule Would Open Floodgates for Predatory Lenders

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New York Attorney General Letitia James has helped organize a coalition of state attorneys general to oppose a new Trump administration rule that would “enable predatory lenders to charge high interest rates on [consumer] loans and bypass state interest rate caps,” she announced this morning. 

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The new banking rule proposed by the federal Office of the Comptroller of the Currency (OCC) would give lenders the power to charge consumers higher interest rates than state usury laws allow. If the policy is approved, alternative, non-bank lenders that partner with national banks would no longer be subject to state inquiries about whether the partnership is an attempt to dodge state interest rate caps. 

James’ joint letter to the OCC calls such partnerships “rent-a-bank schemes,” which “flourished in the late 1990s and early 2000s to facilitate payday lending at interest rates exceeding 300 percent that was illegal under state law. Although the OCC put an end to rent-a-bank schemes in 2003, it now – without sufficient evidence or authority – breezily asserts that these arrangements benefit the U.S. economy and American consumers in several ways, including expanding the availability of affordable credit to the unbanked and underbanked.”

The letter asserts that these alternative lenders will make high-interest loans to people who could fall behind and won’t be able to repay, because it’s more profitable than offering affordable loans. Under the new rule, lenders could charge interest rates of up to 100 percent on short term loans.

As part of the “rent-a-bank” schemes, non-bank lenders team up with national banks because Federal law shields national lenders from state usury laws. The National Bank Act of 1864 permits national banks to charge the maximum interest rate of the state where they are based, rather than the interest rate cap of the state where the borrower lives. The alternative lender handles the underwriting and funding of the loans, and then pays the national bank to serve as the originator on the loan paperwork. The national bank “bearing little if any risk in the loan’s performance,” the letter notes. 

In addition, James and 24 other attorneys general argue that the new rule violates both the National Bank Act and the Dodd-Frank Act. 

“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 that has already wreaked financial havoc on millions is cruel and heartless,” James said in a statement. “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. Rent-a-bank schemes make a mockery of federal law, and the administration’s sanctioning of these schemes undermines the sovereignty of the states whose legislatures and voters have told payday lenders, in no uncertain terms, that their ‘services’ are not welcome here.”