Predatory lenders will take advantage of new federal rule allowing higher interest rates, consumer group says
The True Lender Rule, which questions the power of state governments to regulate interest rate limits, will unleash predatory lending in 50 states, the Consumer Federation of America said.
The rule, approved by the Office of the Comptroller of the Currency in October, would protect predatory, nonbank lenders from state enforcement, which has been used by state regulators and courts to stop them from using banks to evade state interest rates.
“The OCC’s rule usurps state power to prevent usurious rates, regulate non-bank lenders, and uphold their state interest rate caps,” said Rachel Weintraub, legislative director and general counsel for the CFA.
Weintraub said triple-digit interest rates are unconscionable.
“The OCC’s rule eliminates state regulators’ key enforcement tool to protect consumers from these predatory products and the dire consequences of these products,” she said.
Earlier this year, District of Columbia Attorney General Karl Racine filed a lawsuit against Elevate for charging interest rates between 99 and 251 percent, arguing that Elevate, not the bank partner, was the true lender of the loan. Elevate was lending to D.C. residents with interest rates up to 42 times the legal limit.
“The country is facing unprecedented public health and financial crises, and we have seen, time and time again, that predatory lenders target the most vulnerable consumers,” said Rachel Gittleman, financial services outreach manager for the CFA.
Gittleman said, with this rule, the OCC is dismantling safeguards enacted by states to protect those consumers from vicious debt cycles.
“This rule will empower predatory lenders at a time when the OCC should be focused on protecting American consumers,” she said.
Interest rate limits are the most effective way that states have to protect residents from predatory loans, and 45 states and the District of Columbia have enacted caps on installment loans, with median annual percentage rates of 25 percent to 38.5 percent depending on the loan terms.
However, predatory lenders have used shelter in banks’ exemption from these state usury limits and have entered into rent-a-bank schemes where they offer loans through banks to be able to charge very high interest rates.
State regulators argue that the non-bank predatory lender is the true lender of the loan, as they have the main economic interest in it. However, the OCC’s rule states that by putting the bank’s name in the fine print, the bank becomes the true lender.
CFA urged the OCC to withdraw its proposal along other consumer, civil rights, and community groups.