States Challenge FDIC Rule Change on Interest-Rate Caps

(AP Photo/Mark Lennihan, File)

SAN FRANCISCO (CN) — Denouncing the Federal Deposit Insurance Corporation for enabling unscrupulous creditors, California Attorney General Xavier Becerra filed a federal lawsuit Thursday to challenge its rule allowing more lenders to skirt interest rate caps.

State-imposed interest caps protect consumers from excessive interest rates that make it all but impossible for borrowers to repay their loans in full. Federally insured, state-chartered banks are not subject to these caps by the Federal Deposit Insurance Act, and on June 25, the FDIC voted to extend that exemption to any lender — even nonbanks — that buys an FDIC bank loan.

“This provision of the rule is beyond the FDIC’s power to issue, is contrary to statute, and would facilitate predatory lending through sham ‘rent-a-bank’ partnerships designed to evade state law,” Becerra says in the lawsuit joined by seven other states: New York, New Jersey, North Carolina, Minnesota, Illinois, the Commonwealth of Massachusetts, and the District of Columbia.

“California adopted interest-rate caps so that consumers would be protected against unconscionable predatory lending. This FDIC rule allows predatory lenders to skirt these critical state laws and trap borrowers in insurmountable debt,” Becerra said in a statement Thursday. “Preying on consumers in financial distress is bad enough. But giving these predatory lenders the key to evade the law meant to protect consumers is despicable. We’re taking the FDIC to court to stop this unlawful rule before it devastates American families struggling through financial distress.”

The FDIC’s rule is intended to fix a lending conundrum created by the Second Circuit in 2015, when it held that New York’s 25% interest rate cap applied to a debt collector trying to recover a New York man’s credit card debt at 27% interest, even though the debt originally came from a national bank.

The new rule allows a loan’s interest rate permissibility under the Federal Deposit Insurance Act to be determined when the loan is made. The FDIC’s board of directors adopted the rule by a 3-1 vote.

Lone dissenter Martin Gruenberg said he was worried the rule would be exploited by nonbank lenders looking to evade state usury laws. 

“In fact, the practical import of today’s rulemaking is to further insulate high-cost loans made through these very partnerships between nonbanks and bank relationships from legal challenge,” he said. “Most banks enter into third party arrangements with considerable care and oversee them to ensure consistency with applicable law and bank policy, including appropriate safety and soundness principles and effective consumer compliance programs. But we have experience with banks that do not take that approach — that look to make money through rent-a-charter arrangements — and their partners in these arrangements look to profit from the advantages banks have under federal law.

“It is essential that the FDIC not unnecessarily undermine the application of state consumer protection laws to rent-a-charter relationships.”

The attorneys general claim the FDIC’s rule undermines their sovereign interests, and that Congress intended federal preemption of state interest rate caps to apply only to national banks. Moreover, they claim the rule conflicts with the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which declares in three separate subsections that federal banking laws do not prevent states from regulating subsidiaries, affiliates or agents of national banks. They seek a court order invalidating the FDIC rule’s nonbank interest provision.

Thursday’s lawsuit is not the first challenge to federal rule making favoring third party lenders. In July, Becerra sued national bank regulator the Office of the Comptroller of the Currency over its rule exempting lenders who partner with federally regulated banks from state interest rate caps on loans. New York Attorney General Letitia James and Illinois Attorney General Kwame Raoul joined that lawsuit.

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