Several U.S. states sue banking regulator over 'true lender' rule

NEW YORK (Reuters) – Seven U.S. states and Washington, D.C., sued a U.S. banking regulator on Tuesday, seeking to void a rule they said could encourage predatory lending by preventing them from enforcing state laws against exploitative interest rates.

FILE PHOTO: New York State Attorney General Letitia James speaks during a news conference regarding a lawsuit to dissolve the National Rifle Association, In New York, U.S., August 6, 2020. REUTERS/Brendan McDermid/File Photo

The complaint filed in Manhattan federal court against the Office of the Comptroller of the Currency seeks to undo the “True Lender Rule,” which the regulator finalized in October.

The OCC issued the rule to clarify when a bank is the “true lender” for a loan originated in one state and sold off into another. The watchdog said it would provide “legal certainty necessary for banks to partner confidently with other market participants and meet the credit needs of their customers.”

But the states argue it allows lenders to bypass their laws that cap high interest rates by originating loans in less-strict states and then moving them elsewhere.

“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 … and paint a bullseye on the backs” of consumers, said New York Attorney General Letitia James, who led the coalition of states.

She added that many non-bank entities have attempted to partner with national banks to offer ultra-high-rate loans in states where such loans are forbidden.

The OCC did not immediately respond to a request for comment.

The states argue the rule is in direct conflict with the Dodd-Frank financial reform law and other National Bank Act provisions, the lawsuit said.

“The OCC asserts that these ‘partnership’ arrangements benefit the U.S. economy and American consumers in several ways, including expanding the availability of affordable credit to the unbanked and underbanked,” the states alleged in the lawsuit.

“But history has demonstrated that the non-bank lenders that will benefit from the True Lender Rule have little interest in making affordable loans, because it is far more profitable to make high-interest-rate loans to consumers who struggle to repay and that often end in default.”

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