OCC Proposed Rule: True Lenders & Rent-a-Bank Schemes
The year 2020 has heralded in the most severe financial and economic downturn since the Great Depression. As of June, the U.S Department of Labor reported that 18 million Americans are unemployed [1]. The cutoff date for the federal eviction moratorium is imminent and hangs on the uncertainty of being renewed. And more than ever, individuals and families financially affected by the pandemic are turning to short term loans, such as payday loans, as a way to curb the chaos of financial instability. This means taking out a loan to either pay for:
1.) critical necessities (i.e food, clothes, supplies, medical expenses, utilities, rent/mortgage, and automobile payments)
2.) debt consolidation
3.) travel
4.) unexpected situations
Whatever the situation may be for taking out a loan, ultimately, a consumer will find themselves accumulating debt on top of previous debt and/or more debt than they had bargained for.
The situation of consumer debt may now be aggravated by the OCC’s (Office of the Comptroller of the Currency) proposed True Lenders rule, which gives lenders the advantage by charging unfair interest rates through the legal concept of rent-a-banks.
In the 1990s-mid 2000s, predatory lenders partnered with banks to evade state interest rate caps and in response, the OCC and FDIC (Federal Deposit Insurance Corporation) cracked down on this practice [2]. However, on July 20th, the OCC, under the Trump Administration proposed the True Lender rule which specifically stated that a national bank- rather than its non-bank partner is the lender if either (1) it is named in the loan agreement; or (2) funds the loan [3]. This allows lenders to exploit the fact that state interest rate limits do not apply to banks and a loophole in the 2006 Military Lending Act which caps 14 states interest rate limit at 36%. Lenders are able to operate in states who have an interest rate limit of 36% (payday free states). However, these same lenders also have the ability to cooperate with a bank in a non-payday state (i.e. Utah, Louisiana, etc.) where it is legal to issue loans of more than 100% APR, hence the concept “rent-a-bank”. Thus, the legal identity of the true lender is the bank when in reality it is the third-party lender. The consumer, on the other hand, is left completely unaware of all the legal complexity laundering in the background.
What you as a consumer be vigilant of:
(1) The Veterans and Consumer Fair Credit Act (HR 5050), which extends the 2006 Military Lending Act’s 36% interest rate cap nationwide and to all consumers [4]. The bill was introduced in November 19th, 2019 and is still in progression [5]. This bill would crackdown on predatory lenders and their operations of rent-a-banks by closing the loophole in the MLA (Military Lending Act) which allows lenders to evade certain states’ interest rate caps.
(2) Banks tightening underwriting standards by requiring higher debt service coverage ratios and lower loan-to-values [6]. For consumers, this increases the difficulty for those with low credit scores to access credit cards and other modes of financing.
(3) Online ads on social media used by lenders to target those dealing with financial hardships. Based on a Wall Street Journal article, lenders are now bypassing ad bans put in place by Google and Facebook. The article reports that lenders are marketing loans that typically carry annual percentages rates of around 200% to 500% to consumers looking online for financial help [7] amid the pandemic.
At THE ONE LESS FOUNDATION, we believe that all consumers have a right to know who the true owner of their debt is so they can take appropriate actions of recourse when necessary. We support 36% interest rate caps on loans so consumers are able to pay the debt back without taking on debt in usury amounts. We support lenders abiding by the laws in the states in which they operate. Our organization is strongly opposed to the proposed rule titled “National Banks and Federal Savings Associations as Lenders” (under docket OCC-2020-0026 RIN 1557-AE97) because it creates the potential to hide the actual owner/holder of a consumer’s payday loan debt, it over-rides the voices of millions of Americans who live in states with payday loan rate caps, and it denies consumers the right to hold local companies they do business with accountable for any wrong-doings.
Send a letter to the OCC by September 3, 2020, to let them know that you oppose the proposed “True Lender” National Banks and Federal Savings Associations as Lender’ rule and that you support policies that provide clarity to consumers related to the true owner/holder of their debt, limits lenders to charging no more interest than the state they operate in allows and close backdoor loopholes for predatory lenders to operate in states that are currently payday free.
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Post by: Corrine Johnson Research & Policy Specialist, TOLF
Footnotes
[1] 30 million? 18 million? How many Americans are out of work right now? Marketplace
[3] OCC issues proposed True Lender Rule July 20th, 2020, Office of the Comptroller of the Currency
[4] Dear Congress: Do Away with The Rent-a-Bank Ruse, American Banker
[5] All Info- H.R. 5050- 116th Congress (2019-2020): Veterans and Consumer Fair Credit Act, Congress.gov
[6] How to Cope as Banks Adjust their Underwriting, GlobeSt.com
[7] How Payday Lenders Target Consumers Hurt by Coronavirus, The Wall Street Journal