A group of state attorneys general, led by New York A.G. Letitia James, are attempting to stop the Office of the Comptroller of the Currency ("OCC") from implementing its new True Lender Rule that is now in effect. The state attorneys general allege that by implementing the Rule, the OCC is once again fostering abusive lending practices like it did before the 2008 financial crisis, as recognized by Congress.
On January 5, 2021, the attorneys general filed suit against the OCC and Acting Comptroller Brian Brooks in the Southern District of New York. The attorneys general allege the True Lender Rule is in direct conflict with the National Bank Act ("NBA") and the Dodd-Frank Act, exceeds the OCC's authority to regulate under the NBA, and violates the Administrative Procedure Act.
The OCC's True Lender Rule allows nonbank lenders, including payday and auto title lenders, to partner with national banks when issuing loans. The complaint alleges the new Rule retreats from prior OCC policy that admonished national banks for entering into such partnerships.
Under the NBA, national banks are permitted to charge interest on loans at the maximum rate allowed under the state they are licensed, rather than the maximum rate allowed in the state where the loan is issued. This is because national banks are heavily regulated and are subject to extensive federal oversight and supervision. Nonbank lenders, which are subject to far less regulations and federal oversight, are only permitted to charge interest at the maximum rate allowed in the state where the loan is issued.
Under the True Lender Rule, however, nonbank lenders can circumvent state usury laws by partnering with a national bank when issuing a loan. This partnership, the complaint alleges, allows nonbank lenders to take advantage of charging consumers the national bank's "home state" maximum interest rate, with the national bank incurring no financial risk. In other words, a national bank can enter into a loan agreement with a consumer charging the higher interest rate from its "home state," and then immediately sell the loan to its nonbank lender partner. The complaint alleges this, in effect, would catch unsuspecting consumers by surprise and allow nonbank lenders to take advantage of the most vulnerable consumers by evading state consumer protection laws.
The complaint alleges the True Lender Rule allows this by preempting state usury laws. Before the Rule became effective, state courts considered several fact-specific issues when determining whether a loan was effectively issued by a national bank or its nonbank lender partner. This, in turn, allowed state courts to determine whether a state usury law or the NBA applies and what the maximum interest rate should be. Under the True Lender Rule, on the other hand, state courts must deem a national bank the "true lender" if the bank funds the loan or, on the date the loan is issued, is named as the lender in the loan agreement, even if the loan is then immediately sold to a nonbank lender partner.
During the OCC's comment period after its notice of the proposed True Lender Rule was published, the OCC received 4,000 comments, "the vast majority of which were ... to express opposition to the proposal."
The complaint requests the Court to hold unlawful and set aside the True Lender Rule. The Rule remains in effect unless or until the Court holds otherwise. We will continue to monitor and report on any development related to this case.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.