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Better Markets Issues Comment Letter on the OCC's True Lender Proposal

On Sept. 3, 2020, Better Markets filed a comment letter on a proposed rule from the Office of the Comptroller of the Currency (OCC) that would define when a bank can be considered the “true lender” in a loan transaction. If implemented, this proposal would make it easier for predatory lenders to evade state consumer protections with the help of a national bank.

National banks are exempt from many state laws.  For example, a national bank can charge interest rates deemed illegal by any state other than their home state; they are generally exempt from state licensing requirements; and they do not have to meet various state inspection and supervision requirements. However,  national banks are subject to intense supervision by the OCC and a significant body of federal regulations.

By partnering with a state bank or non-bank financial firm, national banks have been able to profitably rent out the preemption of state law they enjoy. exemptions. In a “rent-a-bank” scheme, national banks will issue a loan, often with an interest rate or terms that are illegal under state laws, and then immediately sell it to a nonbank, allowing them to dodge state consumer protection laws and letting the national bank turn a quick profit. Often times, the  nonbank pays for marketing, processes applicants, sets the loan terms, and is contractually obligated to purchase the loan as soon as it is issued while the national bank merely puts its logo on the contracts and provides the up-front capital.

Most courts have determined that in these schemes, the nonbank is in fact the “true lender” given the  national bank’s tangential role, , and that state laws therefore apply. In this proposal, the OCC seeks to effectively overturn these rulings and make rent-a-bank schemes universally effective  by declaring that a national bank can be considered the true lender so long as it is named in the loan documents or funds the loan.

This proposal would have a major and adverse effect on the powers of state governments to enforce consumer protections in their local credit markets. Yet the OCC has failed to even acknowledge the impact of this rule on consumer protection, much less attempt to estimate the impact. The OCC also fails to identify any benefits the proposal would bring. It justifies the proposal by hypothesizing that the current ambiguous true lender doctrine may be discouraging banks from lending but does not cite any evidence to prove that the status quo has had negative consequences for credit markets.

By declining to show that this proposal is either necessary or beneficial in terms of the OCC’s statutory mission, the agency has acted arbitrarily and capriciously. The agency should rescind this misguided rulemaking and revisit the true lender doctrine only if and when it can present data and analysis that proves its approach will benefit the safety and soundness of the financial system and the American people.

Read our full comment letter here, or by clicking the button below.

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