Attorney General Ellison sues to block Trump Administration’s attempts to shield predatory lenders from state usury laws
AG Ellison co-led opposition to new banking rule that would preclude states from holding lenders accountable when they make loans at exorbitant interest rates through “rent-a-bank” schemes; now brings suit to prevent rule’s implementation
January 5, 2021 (SAINT PAUL) – Minnesota Attorney General Keith Ellison today joined a coalition of eight attorneys general in suing to stop a new Trump Administration rule to allow predatory lenders to evade state interest-rate caps, called “usury” laws. The new agency rule would enable predatory lenders to circumvent usury laws through “rent-a-bank” schemes, in which federally regulated banks act as lenders in name only and attempt to pass along their exemption from state law to predatory lenders backing the loans.
In September, AG Ellison co-led a group of 24 states in opposing the then-proposed rule, arguing that it would harm consumers and violate federal law. Today’s lawsuit against the Office of the Controller of the Currency (OCC) asks a federal court to block the rule because it directly conflicts with federal law and exceeds agency authority.
“The Trump Administration has been using its final months, weeks, and hours to rush through an illegal rule that makes it easier for predatory lenders to take advantage of Minnesotans trying to afford their lives. It’s a basic principle of economic fairness that consumers shouldn’t be ripped off — and over and over again, the Trump Administration has shown that that’s exactly what they want to happen. Americans saw through this when they convincingly denied President Trump reelection. I won’t stand by and let a president that Minnesotans and Americans clearly rejected illegally ramrod through an agenda that hurts them,” Attorney General Ellison said.
In 1978, the U.S. Supreme Court ruled that a federally chartered bank can charge whatever interest rate is allowed in the state where the bank has its headquarters, rather than the state where the borrower lives. That case was argued by the Minnesota Attorney General’s Office and the U.S. Supreme Court made its ruling despite arguments by then-Minnesota Attorney General Warren Spannaus that allowing national banks to circumvent usury laws where borrowers live was harmful to consumers and contrary to Congressional intent.
In the last few decades, non-bank entities have attempted to partner with chartered banks to take advantage of this special privilege and offer ultra-high-rate loans in states like Minnesota where such loans are forbidden. Under these schemes, predatory lenders have a national bank appear as the loan’s originator in name only. The predatory lender is the one marketing, underwriting, and funding the loan, but claims that it is exempt from usury laws because of the bank’s exemption from state law.
For decades, federal regulators have denounced and discouraged such rent-a-bank schemes, while state courts around the country have prevented lenders from using them to undermine state laws. Rather, state courts — including in Minnesota — apply state usury laws to the “de facto” lender regardless of who is identified as the originator on loan documents. This doctrine was affirmed as recently as 2016 in a case brought by the Minnesota Attorney General’s Office.
As a shocking and unsupported reversal of prior federal policy, the OCC issued its new rule in October, putting its stamp of approval on rent-a-bank schemes. The rule attempts to improperly prevent courts from engaging in any inquiry into the identity of the actual or “de facto” lender 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 any meaningful risk on it. This rigid, formalist approach will provide an advantage to only banks and predatory lenders, and will do so at the expense of hardworking and unsuspecting consumers.
As Attorney General Ellison and others explain in the comment letter that Attorney General Ellison co-led in September, the OCC’s new rule is wrong and contrary to federal law. Along with the states’ comments, the proposed rule was opposed by the Center for Responsible Lending, the National Consumer Law Center, and other regulators and consumer advocates. All in all, more than 700 individuals or organizations submitted comments, but the OCC rushed through the rule in less than two months and before a new administration could weigh in on the proposal.
In their lawsuit — led by New York Attorney General Letitia James — the coalition argues that the rule stands in direct conflict with the National Bank Act and the Dodd-Frank Act, exceeds the OCC’s statutory authority, and violates the Administrative Procedure Act. The ability to preempt state usury laws in this way is a privilege granted to national banks — and only to national banks — because they are subject to extensive federal oversight and supervision. This privilege is also extremely valuable to national banks because it permits them to lend money at rates greatly exceeding those ordinarily permissible under state law.
Joining Attorney General Ellison and Attorney General James in filing today’s lawsuit are the attorneys general of California, Colorado, Massachusetts, New Jersey, North Carolina, and the District of Columbia. A copy of the lawsuit is available on New York Attorney General James’ website.