Ryan J. Foley/AP Photo
The harms of allowing rent-a-bank schemes and hoping for OCC to crack down on it are already apparent.
The first use of the Congressional Review Act (CRA), the process by which Congress can nullify certain executive branch regulations by a majority vote without the possibility of a filibuster, will come as early as today, as the Senate plans to vote to reverse the Trump administration’s rule allowing for wider release of methane, a harmful greenhouse gas, into the atmosphere. The methane CRA resolution, which has bipartisan Senate support, is likely to pass, which is good news for the environment and emissions reduction. But the fates of five other CRA resolutions are far more uncertain.
Democrats have been fairly nonchalant about using the CRA tool at all, forsaking dozens of potential rollbacks of Trump-era rules in favor of winning down their considerations to just six. The statute’s timeline sets mid-May as the deadline for the passage of all CRA resolutions on former administration rules, leaving little time for Congress to act. One high-profile resolution gets a Senate hearing today, and this will go a long way to determining whether it will get time for a floor vote. Millions of consumer loan borrowers should take note, because whether they will have to pay regulated or outrageously high interest rates will hang in the balance.
The rule in question is known as the “true lender” rule, though critics call it the “fake lender” or the “rent-a-bank” rule. Established by the Office of the Comptroller of the Currency (OCC), the rule gives often predatory non-bank lenders a way around state interest-rate caps. Though more than half of all states restrict the annual percentage rate on consumer loans (usually to 36 percent), under this rule, if the loans are essentially laundered through a federally chartered bank, lenders can evade these interest-rate caps and charge whatever they want to customers of payday-style loans.
OCC’s supervision of national banks is a joke, and even if it bothered to sanction banks for renting out their charters to high-cost lenders, the penalty would be little more than the cost of doing business.
The National Bank Act of 1864 preempts state usury caps for national banks that do not reside in that state. But this OCC rule perverts that logic to the ends of reason. The “rent-a-bank” typically has no interest in the consumer loans in question. As long as banks have their name on the loan agreement, however, they become the “true” lender, regardless of their role (or lack thereof) in the issuance of the loan. This practice is practiced entirely for the purposes of evading interest-rate caps.
It’s based on a nonsensical doctrine that loans are “valid when made” by the bank and can subsequently be transferred to anyone, something the OCC has previously called “longstanding” and “well-settled law.” Except for the fact that this alleged doctrine appears nowhere in the historical record, and was invented just to facilitate this high-cost lending. The whole thing is a trick, a loophole, brought to you by Donald Trump’s OCC.
The Supreme Court ruled in 2015 that such schemes were illegal. Accordingly, the executive branch’s true lender rule enables this evasion of state usury caps in the name of “clarifying” the law for the judiciary. Now the third branch, Congress, is weighing in. Last month Sen. Sherrod Brown (D-OH) and colleagues introduced the CRA resolution to overturn the fake lender rule. The rule “eviscerates state consumer protection laws and allows unregulated payday lending across the nation,” Brown said in a statement last month.
The battle lines on striking down this rule have been predictable, yet fascinating to watch. On one side are 138 academics specializing in consumer protection and banking law, and a bipartisan group of 25 state attorneys general, including Republican AGs from Arkansas, Nebraska, and South Dakota, all states with interest-rate caps. Seven of these state AGs have litigation going against the true lender rule. One of these AGs, North Carolina’s Josh Stein, will testify at the hearing on Wednesday.
The public is also on the side of dumping rent-a-bank; Nebraska voters passed its interest-rate cap just last year with 83 percent of the vote, and presumably doesn’t want to see it so easily evaded. “Congress faces a clear choice: protect consumers from abusive triple-digit interest rates—or protect the profits of millionaire predatory lenders who are exploiting the vulnerable during this pandemic,” said Jeremy Funk of the government watchdog Accountable.US.
On the other side are House Republicans, who urged passage of the true lender rule in a letter to regulators last year. Within weeks of that letter, the signatories received over $200,000 from industry trade groups supporting the rule, according to Accountable.US research.
The OCC has also weighed in aggressively. Brian Brooks, the former acting comptroller who finalized the true lender rule, will also testify Wednesday. More surprising is a letter to Banking Committee leaders from the current acting comptroller, career official Blake Paulson, justifying the rule. Biden has yet to make his own choice to run OCC, so for now Paulson is doing the honors, and he’s actively lobbying for this deregulatory rule that will cost millions of people in high interest on their loans.
Paulson’s argument is weak. He says in the letter that the OCC rule merely provided “legal and regulatory certainty” for banks to navigate partnerships with third parties. It’s true that making it easier for predatory lenders to gouge customers is a kind of certainty, but that doesn’t mean it’s desirable. Paulson adds that the true lender would still be obligated to comply with all federal rules on the loans even if they sell it, and says this guards against harmful rent-a-bank relationships. “The OCC will not hesitate” to “correct the deficiencies” and “protect consumers,” Paulson writes.
That might be comforting if national banks had to actually worry about an aggressive regulator looking down on them. Unfortunately, their regulator is the OCC, among the most pliant regulatory agencies in the entire federal government. OCC’s supervision of national banks is a joke, and even if it bothered to sanction banks for renting out their charters to high-cost lenders, the penalty would be little more than the cost of doing business.
The harms of allowing rent-a-bank schemes and hoping for OCC to crack down on it are already apparent. As consumer advocates explain in a fact sheet, World Business Lenders, a non-bank, is laundering loans through national bank Axos and using that to justify a $67,000 loan to a restaurant at 268 percent interest. Other WBL loans have led to consumer foreclosures. CURO, also known as Speedy Cash, is peddling loans with up to 179 percent interest by routing them through OCC-regulated Stride Bank. If OCC wanted to prevent this activity, it didn’t need to pass a rule to grant “certainty” to its banks; it could have just engaged in actual enforcement.
But that’s not what the OCC does. In fact, the agency defended World Business Lenders with a 2019 amicus brief in a case in Colorado, promoting its historically inaccurate “valid when made” argument. And this is par for the course for an agency that primarily exists as an advocate for banks and financiers.
This is an agency that used its preemption power during the financial crisis to block state laws against predatory mortgage lending. During the financial crisis, former bank lobbyist (and current chair of Citigroup) John Dugan ran the agency and barely sanctioned any major bank for a mountain of fraud and abuse. The myriad Wells Fargo scandals are a function of having its primary regulator, the OCC, do essentially nothing in response. These days the agency spends its time giving shady crypto companies national bank charters.
A very compelling argument can be made that there shouldn’t be an OCC anymore, and its open lobbying for high-interest loans and evading state laws offers powerful testimony to that effect. We don’t have national charters for airlines or appliance manufacturers or sausage makers; an accident of history gave us national banks, rather than state-chartered ones. This was a model primed for corruption from the very beginning. Even when the OCC has had relatively good leaders, the culture of the agency chipped away at their ability to do good work. Thomas Curry, one of those relatively good leaders, is amazingly enough leaning toward abolition, which should tell you something about his faith in anyone being able to right the ship.
The first step to neutering the OCC is for Congress to stand up to it by reversing this patently ridiculous rule. Right now, though, it’s unclear whether there are 50 Senate votes to pass the CRA resolution. The hearing will help clarify the matter, but with the choices so stark between predatory lenders and the public, it’s amazing that any Democrat would have to think for a second about it.
