Most states have enacted usury laws that limit the amount of interest a company may charge on a loan. To evade these laws, payday lenders originated their loan products in the name of national banks, who were exempt from state interest-rate caps under the National Bank Act. Under these arrangements, the bank served as a conduit for the loans in exchange for a fee, but the payday lender funded, serviced and collected the loans — a tactic known as “rent-a-bank.” A key legal doctrine, known as the “true lender rule,” has been used by federal and state regulators to combat these shady operations that have saddled millions of Americans with overwhelming debt. However, this important doctrine itself is now under attack by a regulator that formerly praised it.
Sept. 3, 2020, is the comment deadline for the Office of the Comptroller of the Currency’s (OCC) proposed rule that would overturn the “true lender” doctrine that courts have used since the early 1800s to prevent predatory lenders from evading state usury laws through “rent-a-bank” and similar schemes. Using the words of the U.S. Supreme Court, the National Consumer Law Center Associate Director Lauren Saunders has already commented that “the OCC’s ‘true lender’ proposal would turn state usury laws into a ‘dead letter,’ and eviscerate power that states have had since the time of the American Revolution to protect people from high interest rates” and loan sharking.
The true lender doctrine has long been used to prevent payday lenders and other sub-prime, high-cost lenders from laundering their loans through loose affiliations with banks to avoid state usury laws. The doctrine allows courts to look beyond the technical form or fine print of a loan transaction to examine which party has the predominant economic interest in the loan. Yet under the current administration’s proposal, a payday lender or other nonbank finance company could ignore state interest rate limits as long as either a bank “[i]s named as the lender in the loan agreement,” or the bank “[f]unds the loan.” This proposal would allow payday lenders to resume the rent-a-bank schemes that were shut down by bank regulators in the mid-2000s -- and could jump start a new era of predatory lending.
Many states, including West Virginia, used the true lender doctrine in the early 2000s to stop payday lenders from using (or renting) banks to get around state interest rate limits. In 2014, a West Virginia court found payday lender CashCall had to obey West Virginia’s usury caps and could not charge 96 percent APR because the purpose of the arrangement with a bank “was to allow CashCall to hide behind” the bank. When state and federal regulators began cracking down on these rent-a-bank arrangements, the payday lenders developed a solution — they adapted the structure to use Native American tribal entities as the conduit to ostensibly cloak the loans in tribal sovereign immunity. Hence, the new structure has been dubbed “rent-a-tribe” lending.
Earlier this month and relying on the true lender rule, Bordas & Bordas filed a state-wide class action lawsuit in an action styled McDaniel vs. Curry and American Web Loan, Inc. in the Circuit Court of Ohio County, West Virginia, that challenges a rent-a-tribe lending scheme that charged borrowers interest rates of over 600 percent per annum.
As the Supreme Court said in one case, Scott v. Lloyd, in 1835, “The ingenuity of lenders has devised many contrivances by which, under forms sanctioned by law, the [usury] statute may be evaded…. [I]f giving this form to the contract will afford a cover which conceals it from judicial investigation, the [usury] statute would become a dead letter. Courts, therefore, perceived the necessity of disregarding the form, and examining into the real nature of the transaction.”
The OCC itself has long backed the true lender doctrine as part of a longstanding anti-evasion policy to enforce usury laws. In 2002, the OCC under the Bush Administration shut down rent-a-bank schemes that payday lenders were using, declaring bank privileges “cannot be treated as a piece of disposable property that a bank may rent out to a third party that is not a national bank.” Today the OCC, instead of preventing banks from shielding payday lenders, is attempting to issue a rule that could allow payday lenders to ignore state interest rate limits. This is just another example of how government has been turned on its head by powerful lobbyist and questionable bureaucrats.
Bordas & Bordas has been at the forefront in the fight against predatory lending for more than 15 years and is willing and able to discuss your consumer rights when needed.