Attorney General Bonta: Predatory lending and illegal bank leasing schemes have no place in our financial system | State of California – Department of Justice
OAKLAND – California Attorney General Rob Bonta joined 20 attorneys general in urging the Federal Deposit Insurance Corporation, the Federal Reserve and the Office of the Comptroller of the Currency (collectively, “federal banking regulators”) to explicitly disavow bank leasing systems in their forthcoming guidance for banks on risk management when engaging with third parties. Predatory lenders use bank leasing programs in an attempt to circumvent state laws and charge borrowers interest rates that exceed state limits. In California, for example, where interest rates are capped at 36% for consumer loans between $2,500 and $10,000, payday lenders have tried to partner with banks to lease bank charter and charge an interest rate of 100% or more. To discourage the proliferation of this predatory activity, federal banking regulators should express their strong disapproval of bank leasing systems.
“Predatory lending and illegal bank leasing schemes have no place in our financial system,” said Attorney General Bonta. “I join 20 attorneys general in calling on federal banking regulators to take a stand against this exploitative practice and protect struggling borrowers from insurmountable debt.”
In bank leasing systems, a non-bank lender seeks to avoid government interest rate caps by using a bank that is not subject to these rate caps to act as a “lender”. for its loans in name only. In these schemes, the bank acts as a mere middleman, “selling back” the loan to the non-bank lender, and never has a real financial interest in the loan. Predatory lenders use these schemes to charge borrowers exorbitant interest rates that are illegal under California law.
While federal banking regulators have previously indicated their disapproval of this evasive tactic, under the Trump administration, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency (OCC) issued rules that facilitated bank rental. California is currently leading a multi-state coalition in lawsuits challenging these rules as illegal under the Administrative Procedure Act and supported the recent congressional resolution revoking the OCC’s “true lender” rule, which has also facilitated these schemes. In the comment letter, the coalition argues that the failure of federal banking regulators to disavow bank leasing programs in their proposed guidance invites continued abuse by predatory lenders. The coalition strongly urges them to reject these schemes in their final directions.
Attorney General Bonta joins attorneys general from Colorado, Connecticut, Hawaii, Illinois, Iowa, Maine, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, New Mexico, New York, North Carolina, Oregon, Pennsylvania, Virginia, Washington, District of Columbia and the state financial regulators of Colorado, Hawaii, Maine and the Illinois for filing the letter of comment.
A copy of the letter can be found here.