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Consumer Reports urges OCC to rescind proposal that would encourage “rent-a-bank” lending schemes

OCC proposal undermines state efforts to protect consumers from predatory lenders 

WASHINGTON, D.C. – A proposal by the Office of the Comptroller of the Currency (OCC) would make it easier for predatory lenders to evade state laws limiting interest rates by partnering with national banks, according to Consumer Reports.  In a letter submitted to the OCC today, CR called on the federal regulator to protect consumers from high-cost loans by rescinding the proposal.

“With so many Americans out of work and struggling to pay their bills, the last thing the OCC should be doing is making it easier for shady lenders to charge exorbitant interest rates,” said Antonio Carrejo, policy counsel for Consumer Reports.  “Unfortunately, the OCC’s proposal would enable predatory lenders to ‘rent-a-bank’ that isn’t subject to state consumer protection laws and get away with peddling high-priced loans that trap borrowers in debt.”

Rent-a-bank lending schemes typically involve partnerships between a national bank and a non-bank lender marketing payday loans, auto title loans, or auto installment loans.  The bank originates the loan and the high-cost lender manages all other aspects of the transaction, including marketing, reviewing, approving and servicing the loan.  The high-cost lender buys the loan from the bank and provides it with a small percentage for each loan sold.

By originating the loan with a national bank, high-cost lenders take advantage of their partner bank’s authority under federal law to charge higher interest rates – even though the lender approved the loan before the bank originated the loan.

Federal banking regulators, including the OCC, adopted policies to prohibit rent-a-bank lending schemes beginning in the early 2000s after payday lenders used these arrangements to get around state usury caps.  Since that time, numerous states have successfully challenged rent-a-bank schemes in court, which have found that the nonbank lender is the true lender in the partnership since it gains the most financially from each loan.

In a complete reversal, the OCC’s proposed rule would apply a different standard to determine the true lender and preempt state usury laws from applying to nonbank lenders for loans that are considered made by a national bank.  Under the OCC’s proposal, the national bank would be considered the true lender if it is named as the lender in the loan agreement or funds the loan.  The proposal would also override other state laws involving licensing and examination for nonbank lenders that partner with national banks.

Laws in at least forty-five states that protect consumers from high-interest nonbank installment loans and other predatory loans could be preempted if the OCC adopts its proposed rule, according to Consumer Reports.  Most recently, California adopted interest rate caps on installment loans of $2,500-10,000 in 2019.  In addition, laws capping interest rates on payday loans in 16 states and the District of Columbia could be at risk if the rule is adopted.

“These laws have played a critical role in preventing lenders from charging excessive interest rates that make loans impossible to repay and drive borrowers deeper into debt,” said Carrejo.  “The OCC should avoid adopting policies that make it easier for predatory lenders to exploit vulnerable consumers and rescind this misguided proposal.”

Michael McCauley, michael.mccauley@consumer.org, 415-902-9537