US capital Washington, D.C. and seven other states have filed a lawsuit against the banking regulator, the Office of the Comptroller of Currency (OCC), over a ‘true lender’ rule.
The OCC finalised this rule back in October 2020, which identifies a bank as a “true lender” when a loan is originated in one state and sold off into another.
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According to the regulator, the rule provides “legal certainty necessary for banks to partner confidently with other market participants and meet the credit needs of their customers.”
However, the states argue that it could encourage “predatory lending” as it prevents them from enforcing their laws against manipulative interest rates.
It allows the banks to originate loans in less-strict states and move them somewhere else, hence, bypassing the state laws that cap high interest rates.
A complaint against the OCC was filed in the Manhattan federal court, seeking to undo the ‘true lender’ rule.
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By GlobalDataThe states also argued that the rule directly contradicts the Dodd-Frank financial reform law and other National Bank Act provisions.
The seven states include New York, California, Colorado, Massachusetts, Minnesota, New Jersey, and North Carolina.
New York Attorney General Letitia James, who led the coalition of states, said: “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.”
James added that several non-banks have tried tapping national banks to offer “ultra-high-rate” loans in states where they are banned.
In the lawsuit, the states alleged that “the OCC asserts that these ‘partnership’ arrangements benefit the US economy and American consumers in several ways, including expanding the availability of affordable credit to the unbanked and underbanked.
“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.”
