AG Racine Joins Multistate Lawsuit Against Trump Administration Rule Allowing Predatory Lenders to Gut State Consumer Protections

Attorneys General Argue Unlawful “True Lender” Rule Could Enable Non-Bank Lenders to Bypass State Interest Rate Caps Through “Rent-a-Bank” Schemes

WASHINGTON, D.C. – Attorney General Karl A. Racine today joined a coalition of eight Attorneys General in filing a lawsuit challenging a Trump administration rule that would make it easier for predatory lenders to bypass state interest rate caps. The coalition filed its lawsuit against the Office of the Comptroller of the Currency (OCC) to halt implementation of the Trump administration’s “True Lender Rule,” which could allow payday lenders to operate even in states that have outlawed ultra-high-interest loans through partnerships with banks. The Attorneys General allege that the rule unlawfully reverses decades of OCC policy that guarded against attempts by predatory lenders to circumvent state interest rate caps through “rent-a-bank” schemes— arrangements in which national banks act as lenders in name only to enable payday lenders and other non-bank lenders to evade state consumer protection laws. The Attorneys General assert that this rule would undermine state efforts to protect residents from exploitation and are asking the Court to set it aside. 

“The Council of the District of Columbia and the majority of state legislatures in the United States agree that laws capping interest rates are effective tools to prevent unscrupulous lenders from trapping consumers in cycles of debt,” said AG Racine. “The True Lender Rule would make it easier for predatory payday lenders to operate even in states that have outlawed ultra-high-interest loans. Our coalition filed this lawsuit to stop the Trump administration’s illegal attempt to gut state consumer protections and to protect residents from financial exploitation.”

Most states protect their residents from predatory lenders through state laws that prohibit charging exploitative interest rates. As of February 2020, 45 states have some form of interest rate cap, also known as a usury law. In the District, interest rates are capped at 24% for loans provided by a licensed money lender with a rate stated in the contract. The limit is 6% for loans provided by licensed money lenders that do not state an interest rate in the contract.

Under the federal National Bank Act, national banks licensed by OCC are only required to comply with the interest rate caps in the state where they are based, regardless of where they do business. These banks can preempt state usury laws because they are subject to extensive federal oversight and supervision. However, unscrupulous non-bank lenders have attempted to “partner” with national banks in order to offer ultra-high-interest loans and avoid state interest rate limits.

These rent-a-bank schemes have been closely scrutinized by courts and regulators to determine whether the national bank or the non-bank is the “true lender”—and to force non-bank lenders to comply with state interest rate caps if they are found to be the true lender. However, under the Trump administration’s new “True Lender Rule,” a national bank may be considered the true lender—and the loan exempt from state interest rate caps—so as long as the bank is either named as the lender on loan documents or the initial funder of the loan.

In their lawsuit, led by New York AG Letitia James, the Attorneys General argue the Trump administration’s “True Lender Rule” will only serve to help banks and predatory lenders and will do so at the expense of unsuspecting consumers. They also assert that the rule represents a stark departure from decades of OCC policy, directly conflicts with the National Bank Act and the Dodd-Frank Act, exceeds the OCC’s statutory authority, and violates the Administrative Procedure Act.

A copy of the complaint is available at:

Joining AG Racine and AG James in filing today’s lawsuit are the Attorneys General of California, Colorado, Massachusetts, Minnesota, New Jersey, and North Carolina.

Combatting Predatory Lending
This lawsuit is part of a broader OAG effort to protect District residents from predatory lending. In September 2020, AG Racine and 23 AGs submitted a comment letter to the OCC objecting to the proposed True Lender Rule. In 2019, AG Racine led a comment letter opposing the Trump administration’s efforts to eliminate rules protecting consumers from abusive payday and vehicle title loans and led a coalition of 14 states urging the Federal Deposit Insurance Corporation to protect borrowers from abusive lending practices. In 2018, he also led a 15-state coalition in a friend-of-the-court brief filed in a case in which payday lenders attempted to evade state laws by contracting with Native American tribes to offer loans.