Days Before Crucial Deadline, CRL Joins Over 300 Groups Calling for Congress to Rescind “Fake Lender” Rule that Facilitates Predatory Loan Schemes

March 22, 2021
Re: Support CRA challenge to OCC “fake lender” predatory lending rule

Dear Member of Congress,

The undersigned 326 civil rights, community, consumer, faith, housing, labor, legal services, senior rights, small business, and veterans organizations representing all 50 states and the District of Columbia write to urge you to support the Congressional Review Act challenge to the OCC’s final rule, “National Banks and Federal Savings Associations as Lenders,” which will unleash predatory lending in all fifty states.

The final rule, enacted by the OCC in October 2020, overturns 200 years of caselaw endorsed by the Supreme Court that allows courts to look beyond contrivances to prevent usury evasions. The rule replaces the longstanding “true lender” anti-evasion doctrine with a “fake lender” rule that allows lenders charging rates of 179% or higher to evade state and voter-approved interest rate caps merely by putting a bank’s name on the paperwork – just as payday lenders were doing in the early 2000s. The rule has already been challenged by eight Attorneys General.

Interest rates caps are the simplest and most effective way to protect consumers from predatory lenders. States have had the power to enact these caps since the American Revolution. At least 45 states and the District of Columbia (DC) have rate caps on at least some installment loans, depending on the size of the loan. While many states permit short-term payday loans, 17 states and DC—representing about a third of the U.S. population—enforce interest rates of 36% or less that keep all high-cost loans out of their state.

American voters strongly support state rate caps on a bipartisan basis. In November 2020, 83% of voters in Nebraska enacted a rate cap ballot initiative to place a 36% interest rate cap on payday loans. Nebraska thus joins states like Arizona, Colorado, Montana, and South Dakota where strong bipartisan votes in recent years illustrate the public’s overwhelming support for these usury laws. According to recent polling, 70% of voters across party lines support a 36% rate cap, and during the coronavirus pandemic, 81% of Americans support prohibiting high-interest loans.

However, non-bank predatory lenders have sought to evade state usury laws by entering into “rent-a-bank” schemes with a few, rogue banks. Banks are largely exempt from state rate caps, and through these schemes, the non-bank predatory lender launders loans through the bank in order to claim that state interest rate limits do not apply. These lenders charge triple-digit interest rates, target the financially vulnerable and communities of color, and trap consumers in devastating cycles of debt.

Payday lenders first tried using rent-a-bank schemes in the early 2000s, putting a bank’s name on the paperwork, just as the OCC rule now allows, claiming the payday lender was just a “servicer” for a bank loan. State attorneys general, courts, and federal bank regulators shut down these early payday loan rent-a-bank schemes. Relying on a centuries-old anti-evasion doctrine, courts “followed the money” to find that the payday lender, not the bank, was the “true lender.” But rent-a-bank lending is back, now being used to make longer-term installment loans at rates that exceed voter- and legislature-approved rate caps.

High-cost installment loans are an even bigger and deeper debt trap than short-term payday loans. The amounts are bigger, the interest charges are higher, they go on for a longer period of time, and they are harder to escape with help from friends or family.

OCC-regulated banks are already helping to make some of the most predatory installment loans on the market with interest rates of 100% and higher. For example, after California adopted an interest rate cap on loans above $2,500, CURO – which operates the SpeedyCash and RapidCash brand of payday loans and high-cost installment loans – brazenly announced that “bank partnerships are great” and would allow CURO to ignore the new law. OCC-regulated Stride Bank is now piloting loans up to 179.99% for CURO’s Verge Credit in a plan to expand to states that do not permit those rates for non-banks.

Another OCC-regulated bank, Axos Bank, launders loans for the predatory, subprime small business lender World Business Lenders. WBL loans – in the tens and even hundreds of thousands of dollars – carry rate rates of 139% APR or higher, and are often secured by the small business owner’s home, putting many into foreclosure.

In June 2020, the District of Columbia Attorney General filed suit against yet another rent-a-bank lender, Elevate Credit, Inc.. The DC Attorney General argued that Elevate is the true lender of loans made in DC, well in excess of the District’s rate cap. Elevate sold two short term loan products to District residents that carried interest rates between 99 and 251%, up to 42 times the legal limit in DC. In two years, Elevate made 2,551 loans to residents well above the maximum interest rate of 24% for lenders that disclose their rate in contracts and 6% for those that do not.

Currently, there are only a few of these rogue, predatory lenders, but they will spread to all 50 states if the OCC rule is not overturned. Lenders’ use of online platforms allows them to inundate markets across the United States. By gutting the long-standing anti-evasion doctrine, the OCC’s rule will eviscerate the power of state governments to independently regulate interest rate limits and will have horrible consequences for consumers, small businesses, and especially, communities of color.

The OCC’s “fake lender” rule protects rent-a-bank schemes by making them exempt from state interest rate caps as long as a bank is “named as the lender in the loan agreement” – that’s it! The non-bank lender could control all interaction with the borrower, take on virtually all of the risk, reap the vast majority of the profits, but could ignore state laws that apply to non-bank lenders. The OCC final rule will leave states with no ability to protect their interest rate caps, leaving usury laws – in the words of Chief Justice Marshall – a “dead letter.”

States must be able to protect their residents from the harms of predatory lending, especially amidst a global pandemic that has hit low- and moderate-income families and communities of color, especially Black, Latinx, and Native American communities, particularly hard due to underlying health and socioeconomic disparities. These high-cost loans do not promote financial inclusion. Instead, they exacerbate financial exclusion. They cannot be justified as providing “access to credit.” Instead, they trap borrowers in destructive debt cycles, leaving borrowers with ruined credit and unable to borrow at lower interest rates in the future.

Therefore, we urge you to support the Congressional Review Act challenge to the OCC’s true lender rule, which will eviscerate the power of state interest rate caps and rid state regulators of the single most effective tool to protect consumers from predatory lending.