Would-be lenders have long tried to evade state usury laws by using what are known as bank leasing programs: an out-of-state bank, which is not bound by interest rate caps in the state of the payday lender, acts as a front to the company that is actually originating a high interest loan that they could not legally take out on their own . In return for “hiring” itself in this way – expending little effort and taking little risk in the process – the bank gets a small slice of the action.
Such programs were common about 20 years ago, but were mostly regulated in the early 2000s. But, says NCLC’s Saunders, they’ve made a comeback in the past two years, in part because of application. His organization has documented bank leasing programs involving at least six banks in at least 30 states during this period.
To combat such schemes, regulators have historically invoked what is known as the true lender doctrine, a legal principle that allows courts to determine which entity is the true lender based on factors such as who did the work of marketing to generate the business, who takes the financial risk, and who is most likely to benefit. In the eyes of the law, the real lender must comply with the applicable laws.
the OCC October decision essentially rejects the doctrine, instead stating that the true lender is simply the entity named as the lender in the loan agreement.
In other words, consumer advocates say, the OCC rule is a green light for payday lenders to circumvent state usury laws by simply typing in the name of a willing outside bank. in the fine print of its loan documents.
The OCC rejects those concerns, saying bank lease systems “have no place in the federal banking system” and denying that the decision facilitates them. Nothing in that provision absolves banks of their obligation to comply with federal lending and consumer protection rules, the OCC notes, insisting the rule simply eliminates legal uncertainty about who lends. a loan and what laws apply accordingly.
“By clearly identifying when the bank is the true lender, we can hold the bank accountable for all compliance obligations associated with making the loan,” said Bryan Hubbard, OCC’s Assistant Comptroller of Public Affairs.
But Saunders calls the OCC’s assurances “completely hollow.” The fact that banks must comply with federal and even state laws does not preclude them from participating in bank leasing programs, she says. “As the OCC is well aware, nearly every state in the country has no cap on bank interest rates, and the law allows banks to charge any rate allowed by their home state. , no matter where they lend,” she says.
“If what the OCC says is true, the rule is insufficient in not expressly prohibiting bank rental systems,” agrees Carrejo of CR. “In fact, the rule represents a complete abandonment of a two-decade-old policy of explicitly banning bank rental systems.”