Attorney General Gurbir S. Grewal today joined a coalition of eight Attorneys General in suing the federal Office of the Comptroller of the Currency (OCC) over a new rule that would undermine efforts by New Jersey to keep predatory lenders from charging exorbitant interest rates on loans by bypassing state-imposed interest rate caps — or usury laws — designed to protect borrowers from exploitation. At issue is the True Lender Rule, which enables predatory lenders to circumvent state-set interest rate caps through “rent-a-bank” schemes — arrangements which allow heavily-regulated national banks to act as lenders in name only, for the express purpose of enabling payday lenders and other non-bank lenders to evade state usury laws. Through today’s lawsuit, filed in federal court in New York, New Jersey and the other participating states seek to block the rule’s implementation. “New Jersey’s strong laws against predatory lending have never been as important as they are now when so many families are struggling economically in the midst of the COVID-19 pandemic,” Attorney General Grewal said. “Unfortunately, over the last four years, we’ve seen the federal government repeatedly side with predatory lenders and take steps to make it harder for states like New Jersey to combat unconscionable lending practices. Until these Trump-era policies are reversed, we will continue to fight for New Jersey and its residents in court.” “Rent-a-bank schemes undermine the civil and criminal usury laws New Jersey has put in place to protect our residents,” Division of Consumer Affairs Director Paul R. Rodríguez said. “Our laws have kept unscrupulous lenders from gaining a foothold in our state, but this new rule undermines those protections and will make it easier for predatory payday and vehicle title lenders to profit at the expense of New Jersey consumers.” Under the federal National Bank Act, national banks that are licensed and regulated by the OCC are subject to extensive federal oversight and supervision.
In exchange, they are permitted to charge interest on loans at the maximum rate permitted by their “home” state (the state where the national bank is located), even in states where that interest rate would violate the states’ usury laws.
As a result, many national banks have located themselves in states that allow high-interest rates. For years, non-bank entities have attempted to partner with national banks to take advantage of these banks’ special privileges and to offer ultra-high-rate loans in states where such loans are prohibited. Courts have scrutinized these lending relationships and concluded that state-law usury caps apply unless the national bank, rather than the non-bank, is the “true lender.” However, under the new OCC rule, courts would be prevented from engaging in any such inquiry so long as the national bank is either named as the lender on loan documents or the bank initially “funds” the loan. Further, the new rule would allow the bank to instantly sell the loan and never take on any meaningful risk. Today’s complaint asserts that the True Lender Rule will advantage only banks and predatory lenders, and will do so at the expense of hardworking and unsuspecting consumers. The complaint also alleges that the rule is in conflict with the National Bank Act, exceeds the OCC’s authority, and violates the Administrative Procedure Act.
Moreover, the rule represents a stark departure from decades of OCC policy against national banks entering into sham rent-a-bank arrangements.