Regulatory Shift Favoring Payday Lenders Challenged by 8 Attorneys General

A manager of a financial services store in Ballwin, Mo., counts cash being paid to a client as part of a loan in 2018. (AP Photo/Sid Hastings, File)

MANHATTAN (CN) — Standing up for vulnerable Americans whom the Covid-19 pandemic has brought to the brink, seven attorneys general joined New York’s top prosecutor Tuesday in a court challenge of interest rates that President Trump has allowed to go sky high, a boon for predatory payday lenders.

“Rent-a-bank schemes make a mockery of federal law, and the administration’s sanctioning of these schemes undermines the sovereignty of the states where legislatures and voters have told payday lenders, in no uncertain terms, that their ‘services’ are not welcome here,” New York Attorney General Letitia James said in a statement.,

Filed in the federal Southern District courthouse, the 69-page complaint takes aim at a final rule adopted Oct. 30 by the Office of the Comptroller of the Currency and put into effect on Dec. 29.

The True Lender Rule allows lenders to bypass state restrictions on high interest rates by originating loans in states with more lenient rules and then transferring them elsewhere. 

James says the change undermines states’ rights to prohibit exploitative and abusive lending practices. The attorneys general of California, Colorado, Massachusetts, Minnesota, New Jersey, North Carolina and the District of Columbia all joined the case.

They say the new rule contravenes the National Bank Act and the Dodd-Frank Act, as well as longstanding bureau policy that strongly condemns rent-a-bank schemes in which a national bank merely acts as a conduit for loans that are illegal under states’ usury laws.  

“Indeed, with no basis in fact, law, or policy, the True Lender Rule reverses prior OCC policy and practice to instead endorse sham arrangements between non-bank lenders and National Banks under which the bank has no meaningful involvement in the marketing, origination, or underwriting of the loans, nor the preponderant economic interest in the loans,” the complaint states.  

“By endorsing these sham arrangements, the OCC turns a blind eye to its own historical opposition to rent-a-bank schemes and to the prospect of abusive, triple digit interest-rate loans being made to financially distressed consumers in States that expressly forbid such loans,” the complaint continues. 

Invoking the Administrative Procedure Act, as well, the states say the rule is “arbitrary and capricious.”

“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 is cruel and heartless,” Attorney General James said Tuesday. “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 and paint a bullseye on their backs.”

New York, for example, has both a civil usury rate, set at 16% interest per year, and a criminal usury rate, set at 25% interest per year. 

California tightened its payday lending law last year, setting a 36% interest rate cap for payday loans. Illinois passed laws in 2005 and 2010, capping interest for loans at $15.50 per $100 and 36% for certain loans.  

California, Illinois and New York previously sued the Office of the Comptroller of Currency last July challenging similar rulemaking.  

Bryan Hubbard, a spokesman at the Office of the Comptroller of the Currency, declined to comment on the lawsuit Tuesday afternoon.

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