Seven states sue regulator over “real lender” rule on interest rates

Seven states sued the Office of the Comptroller of the Currency (OCC) on Tuesday to repeal a rule they said overrides the regulator’s authority and would allow lenders to evade the state’s maximum interest rates.

In a complaint Filed Tuesday, seven Democratic attorneys general asked the U.S. District Court for the Southern District of New York to rule the OCC’s “real lender” rule illegal, echoing concerns voiced by fair lending advocates and some regulators. the state.

The trial is led by New York Attorney General Letitia James and includes attorneys general from California, Colorado, Massachusetts, Minnesota, New Jersey, North Carolina and the District of Columbia.

“This rule would be wrong at any time, but the Trump administration’s attempts to free predatory lenders on unsuspecting New Yorkers in the midst of a pandemic are cruel and heartless,” James said in a statement.

Trump-appointed interim controller Brian Brooks finalized a rule in October to clarify who is the “real lender” of a loan made to a client in a partnership between a nationally chartered bank and a third party, usually a non-bank lender.

Such partnerships can allow a financial company to offer a client a loan with a higher interest rate than that allowed by the laws of its state by partnering with a federally chartered bank headquartered in a State with a higher interest rate cap.

Courts in the United States have ruled differently on whether the bank or the third party is the true lender, which can determine whether the loan is illegal and which party is responsible for the violation of the law. Under the OCC rule, the true lender of the loan is the party that is either listed as the true lender or is financing the loan.

The OCC argued that its approach creates a clear and consistent standard that will always hold banks accountable for the federal laws it enforces.

But the seven attorneys general argue that the OCC does not have the authority to issue the rule and that the rule violates federal laws that determine when state laws on consumer financial protection can be preempted.

Attorneys General also expressed concern that the OCC rule could allow the rise of “rent-a-bank” programs, in which a financial firm works temporarily with a national bank to issue a loan. which would violate the state’s interest rate ceilings and then assume full control over the loan.

“Rather than stem the tide of predatory and predatory lending that trap vulnerable consumers in debt cycles, the Trump administration wants to open the floodgates by sanctioning programs that allow the financial services industry to target New Yorkers and paint a bubble on their backs, ”says Jacques.

The OCC insisted in October that the rule would hold banks accountable for such programs and that the agency would use its supervisory power to ensure compliance.

“As the true lender of a loan, the bank retains the compliance obligations associated with the granting of that loan, thereby allaying concerns about damaging rental rental agreements,” he added. OCC said in October.