Consumer groups line up against proposed banking rule change

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The groups say the OCC is overturning state interest rate caps

A number of consumer groups have filed comments with the Office of Comptroller of the Currency (OCC), opposing a proposed rule change they say will overturn state laws limiting how much interest consumers can be charged.

Currently, 45 states have laws on the books that cap interest rates at a certain level, usually around 36 percent. That makes it all but impossible for small-dollar lenders to operate in those states since the interest rate on these short-term loans can easily be in the triple digits.

Since national banks are not subject to state laws, some payday lenders have proposed teaming up with a bank when they make short-term loans. Consumers get the loan from a payday loan storefront, but the loan would actually come from the unregulated bank on paper, which under the law can charge whatever it wants.

“Under this proposal, a bank makes a loan if, as of the date of origination, it is named as the lender in the loan agreement or funds the loan,” the OCC said in its proposed rule change.

‘Explosive, high-cost loans’

Critics say this proposal would open up consumers to dangerous lending practices that could threaten their financial stability.

“This proposed rule would unleash predatory lending in all 50 states, including the 45 states that have enacted interest rate caps to protect their residents from exploitive, high-cost loans,” said Rachel Gittleman, financial services outreach manager at the Consumer Federation of America (CFA).

The Center for Responsible Lending (CRL) calls the rule change an “end run,” allowing lenders to overcome state regulations that limit interest rates. Critics also call it a “rent-a-bank” scheme, since the bank of record has little involvement in the actual loan, though it may loan the money to the third-party lender, which in turn loans it to the consumer.

“The OCC’s proposal provides that a bank ‘makes’ the loan and thus is the lender -- so that state interest rate laws do not apply -- so long as the bank’s name is on the loan agreement or the bank funds the loan,” CRL said in a statement. “This rule would prohibit courts from looking behind the fine print form to the truth about which party is running the loan program and is the ‘true lender.’”

Who is the true lender?

The “true lender” part of the current regulation has allowed the courts to prevent evasions of state usury laws by looking beyond the official forms and determining what entity is actually making the loan. Lauren Saunders, director of the National Consumer Law Center, says that would end under the OCC’s proposed rule.

“The true lender doctrine has long been used to prevent payday lenders and other high-cost lenders from laundering their loans through banks, which are not subject to state interest rate caps,” Saunders said.

In a recent op-ed in American Banker, John Ryan, CEO of the Conference of State Bank Supervisors, urged the OCC to let Congress determine what is and isn’t a bank, saying the emergence of the fintech industry has muddied the waters. 

Ryan also suggested that for a business to be considered a bank, it should be required to accept deposits as well as lend money.

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