States Sue Bank Regulator to Overturn ‘True Lender’ Rule

A group of eight state attorneys general filed suit yesterday in federal court in New York to block a rule that was issued by the Office of the Comptroller of the Currency that aimed to close a gap in the process of banks selling loans to third parties, such as debt buyers, arguing that the rule allows predatory lenders to circumvent state usury laws.

A copy of the lawsuit, which pits the AGs of California, Colorado, the District of Columbia, Massachusetts, Minnesota, New Jersey, New York and North Carolina against the OCC — a regulator of national banks — can be accessed by clicking here.

The OCC enacted the rule back in October and it went into effect in late December. Known as the “True Lender” rule, it says that the bank that makes a loan is the “true lender” in the context of a relationship between a bank and a third party. The proposed rule supplements a rule that the OCC and the Federal Deposit Insurance Corp. each recently implemented that confirms the “valid when made” doctrine, which states that the terms of a loan remain valid after the loan is sold to an entity by a national bank.

The goal of the rules is to reduce “legal uncertainty” that may have discouraged banks and third parties from partnering and had “chill”ed innovation, which restricts consumer access to credit, according to the OCC.

But the AGs argue that the rule allows non-banks to partner with financial institutions and circumvent state usury laws.

“Rather than stem the tide of exploitative and predatory loans that trap vulnerable consumers in cycles of debt, the Trump Administration wants to open the floodgates by sanctioning schemes that allow the financial services industry to target New Yorkers and paint a bullseye on their backs,” said Letitia James, the Attorney General of New York, in a statement.

Among the arguments made by the AGs in their lawsuit are:

• The OCC’s standard for determining the “true lender” of a loan makes little sense as loans can be funded by one entity while another is named as the lender in loan documents;
• The OCC has failed to consider the harm to consumers this rule would create;
• The OCC has failed to set forth any factual findings or reasoned analysis to support its rule;
• The OCC has violated the federal Dodd-Frank Act, which outlines multiple actions the OCC must take before issuing rules that preempt state consumer financial laws; and
• The OCC has abandoned its longstanding policy of preventing rent-a-bank arrangements without explaining the reason for the policy reversal. 

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