Warren Blasts Trump Administration Rule That Allows Lenders to Profit Off of Struggling Consumers and Urges Congress to Nullify the Rule in Coming Weeks
Washington, DC - In a Senate Banking, Housing, and Urban Affairs Committee hearing today, United States Senator Elizabeth Warren (D-Mass.) questioned Brian Brooks, Former Acting Comptroller of the Currency, who finalized the True Lender Rule under the previous administration that has helped lenders profit off of struggling consumers.
In a "rent-a-bank" arrangement, a nonbank lender, like an online lender or a payday loan company that would usually be subject to usury laws, finds a bank that is willing to originate a loan on its behalf and funnels the loan through the bank and avoid state interest rate caps.
Though Mr. Brooks said the OCC has been tough on banks, Senator Warren discredited this using an example from Massachusetts. In 2018, Axos Bank rented itself out to a nonbank company called World Business Lenders to lend to a Massachusetts small business at a 92% interest, well above the Commonwealth's usury cap of 20%. The company arranged the loan, set the terms, collected the payments, but the name "Axos Bank" was on the loan document. The OCC took no enforcement actions against Axos Bank, even though it had the clear authority to do so. Despite Mr. Brooks's claims that the True Lender Rule was necessary for the OCC to enforce the law against banks, examples from the early 2000s demonstrate that the OCC already had that authority, but just failed to exercise it under the leadership of Mr. Brooks and his Trump-appointed predecessors, as the example of Axos shows.
Senator Warren urged her colleagues to support a Congressional Review Act Resolution to nullify the True Lender Rule in the coming weeks.
Transcript: The Reemergence of Rent-a-Bank?
U.S. Senate Committee on Banking, Housing and Urban Affairs
Wednesday, April 28, 2021
Senator Warren: Thank you, Mr. Chairman.
So in our legal system, states set interest rate caps, determining what interest rates constitute usury. If I lend to my neighbor in Massachusetts, our interest rate will be capped at the Massachusetts maximum, which is 20%.
The idea of protecting borrowers from usury dates back to the Code of Hammurabi, to the Bible, to the Koran-and to every colony in pre-Revolutionary America and every state in the United States. In 1979, the Supreme Court took that away, opening a loophole to let federally-chartered banks escape centuries of usury laws. And then over time, banks figured out that they could open that loophole even wider through the so-called "rent-a-bank" scheme.
Now, under this arrangement, a nonbank lender, like an online lender or a payday loan company that would usually be subject to usury laws, finds a bank that is willing to originate a loan on its behalf and funnels the loan through the bank and avoids state interest rate caps. That means that instead of interest rate caps like 20%, which the state legislature determined, interest rates can go to 35%, or 400%, or a 1000%.
Last year the OCC issued a rule clarifying who is entitled to the usury exemption in cases like these.
Mr. Brooks, you were Acting Comptroller when the OCC's True Lender Rule was finalized. The rule acknowledges that rent-a-bank schemes have, and I'm going to quote you here, "no place in the federal financial system." Is that your personal view as well?
Mr. Brooks: Absolutely.
Senator Warren: Good. It is mine, too. So let's take a look at what the rule you pushed through actually allows.
Mr. Brooks, under your rule, if a payday lender arranges a loan for a consumer, it is subject to state usury laws. But under the OCC's new rule, if that same payday lender arranges for a bank to originate the loan and then the payday lender immediately buys the loan back from the bank to collect the payments, the bank would be considered the "true lender," so long as it was named in the loan agreement, and that loan would be exempt from the state's usury laws under this rule from the OCC. Is that correct?
Mr. Brooks: If the bank is named as the lender, so the consumer is told that's their lender, or if the bank funds the loan, then right, the bank is expected to treat that as though it's its own loan for underwriting, consumer protection, and all other purposes.
Senator Warren: And because banks have an exemption from state usury caps, there would essentially be no limit as to what the payday lender could charge a borrower if it just funnels its loan through a bank. So could it be 20%? Or 35%? Or 400%? Or 1000%?
Mr. Brooks: Well, Senator Warren, I disagree with the premise because in the example we're talking about, it's not that the payday lender is charging a rate. It's that the bank is charging a rate, which means the bank has the assess ability to repay. They have to assess fair lending and everything else. It is not that the payday lender is originating. It is that the bank is originating.
Senator Warren: I see what you're trying to do with the language about who's originating, and I understand that the payday lender has gotten the bank to put its name on the paper. But my question is, if it's the payday lender who fines the customer, who has the whole idea, who puts this together, but gets the bank to put its name on the paper, will that loan be subject to usury laws? It's a pretty straightforward question.
Mr. Brooks: I think, Senator Warren, that it's the preamble to the question that is not straightforward because the preamble assumes that the bank would originate a payday loan with all that implies: with the likelihood of refinance, with the likely inability to repay, et cetera. Banks aren't allowed to do that. The whole point--
Senator Warren: Let me just stop you right there just because I want to be clear on this. There's the new rule you've put in place says, let's look at the paperwork and if the bank's name is on the paper, that's what's going to control. Now, I realize that you want to talk about the additional other places that there are rules and regulations governing the behavior of banks, so the OCC is going to let payday lenders get an exemption from usury laws, but the OCC is going to continue to take enforcement actions when the bank originates a loan if it doesn't consider, for example, the borrower's ability to pay. In other words, I think what you're saying to me is the OCC will be tough on banks. Is that right?
Mr. Brooks: Well, there's a lot that you said that I disagree with, but yes, the OCC's history of being tough on banks in non-ability to repay circumstances is pretty well demonstrated.
Senator Warren: If the Chair will just indulge me for a minute here. I want to look at the OCC's history on how tough you've been. Let me just look at an example from Massachusetts, and that is in 2018, Axos Bank rented itself out to a nonbank company called World Business Lenders to lend to a Massachusetts small business at 92% interest, which is well above our Commonwealth's usury cap of 20%. The company, arranged the loan, set the terms, collected the payments - but the name "Axos Bank" was on the loan document.
So let me just ask you, Mr. Brooks. This will only be a short question. How many enforcement actions has the OCC taken against Axos Bank in recent years?
Mr. Brooks: It's a great question, but we didn't have the True Lender Rule in 2018 which is sort of--
Senator Warren: So how many enforcement actions did you take because you had all the rest of the rules were still in place.
Mr. Brooks: I mean, Senator Warren. I personally imposed more than a billion dollars in penalties and--
Senator Warren: How many? It's a really straightforward question. I've got one bank charging 92% interest. How many enforcement actions did you take? There's a word you don't want to have to say here.
Mr. Brooks: I-- I-- I'm--
Senator Warren: It's zero.
Mr. Brooks: I-- I'm not sure.
Senator Warren: It's zero. None.
Senator Warren: Under the previous administration, banking regulators wrote rules the way the banking industry wanted, created loophole after loophole for bad actors, and put the interests of the wealthy and the powerful ahead of families and small businesses.
We're going to have a chance to vote on this in the Congressional Review Act Resolution to nullify the True Lender Rule, and I very much hope that we pass that and undo the damage that the Trump-appointed regulators have done.
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