WASHINGTON–A group of academics and other scholars have sent a letter to Congress urging it to use the Congressional Review Act (CRA) to overturn the Office of the Comptroller of the Currency’s (OCC’s) final rule on National Banks and Federal Savings Associations as Lenders, known as also the “true lender” rule.
The letter is the latest effort by a coalition of organizations arguing payday-loan-like rates are being charged consumers by lenders taking advantage of a loophole.
“The Rule usurps the critical role of states in limiting the interest charged to their citizens by nonbank lenders—a role that states have held since the founding of this country…. ,” the letter reads. “This short-sighted reversal effectively circumvents the long standing principle of applying a ‘substance over form’ analysis to prevent evasions of usury laws, a principle that has been endorsed by the Supreme Court and state courts since the earliest days of our nation.”
An Age-Old Evasion
The scholars noted that all of the original 13 states had usury laws, and 45 states currently do, but attempts to evade usury laws are as old as the laws themselves.”
According to the National Consumer Law Center, the “true lender” doctrine addresses evasions where payday lenders and other high-cost lenders form “superficial arrangements with banks, put the bank’s name as a lender on the loan agreement, and used the bank as the nominal originator of the loan” in order to take advantage of the lack of interest rate limits that applied to banks.
“In doing so, these high-cost lenders tried to charge borrowers interest rates that were otherwise illegal if the lender made the loan itself,” the NCLC said.
But, the NCLC added, courts have relied on the longstanding anti-evasion doctrine to determine if the “true lender” is a state-regulated lender covered by state usury laws.
“The usury statute contemplates that a search for usury shall not stop at the mere form of the bargains and contracts relative to such loan, but that all shifts and devices intended to cover a usurious loan or forbearance shall be pushed aside, and the transaction shall be dealt with as usurious if it be such in fact,” the letter states.
Rejecting History
The letter criticizes the OCC for “rejecting this overwhelming history that courts can ignore contrivances and search instead for the truth in order to prevent evasions of usury laws … The result of the OCC Rule will be to strip states of their agency in regulating usurious lending by nonbanks to their citizens. Over 200 years of legal precedent from states and the U.S. Supreme Court will be eliminated by this ill-conceived and overreaching Rule.”