Trump Administration Sued for Enabling ‘Rent-a-Bank’ Schemes

(Bloomberg) -- New York, California and Illinois sued the Trump administration over a new rule that exempts buyers of high-interest loans from state interest-rate caps, alleging the change will increase predatory lending.

The suit, filed Wednesday in federal court in Oakland, California, claims the change proposed last month by the Office of the Comptroller of the Currency undermines state laws intended to protect consumers. The change is “arbitrary and capricious” and violates the federal Administrative Procedure Act, according to the lawsuit. The rule is set to take effect Aug. 3.

“This is a case about federal overreach,” the states’ Democratic attorneys general said in the complaint. “The rule is beyond the OCC’s power to issue, is contrary to statute, and would facilitate predatory lending through sham ‘rent-a-bank’ partnerships designed to evade state law.”

Current U.S. law allows federally chartered banks to charge interest rates that exceed state limits, but non-banks can’t. Widespread complaints from the lending industry prompted the OCC’s rule.

“The rule protects the sanctity of legal contracts and provides the legal certainty to support the orderly function of markets and availability of credit,” the regulator said in an emailed statement. “We are confident in our authority to issue a rule on this matter and look forward to defending that authority.”

Nonbank lenders that aim to profit from buying high-interest bank loans faced potential restrictions from charging the full interest rate as a result of state caps.

The states allege the new rule will facilitate so-called rent-a-bank schemes “in which banks, not subject to interest-rate caps, act as a mere pass-through for loans that, in substance, are issued by non-bank lenders,” according to the complaint.

“All this rule does is make it easier for bad actors to charge New Yorkers triple-digit interest rates on loans and chart a path to more easily take advantage of consumers, which is why we are taking action,” New York Attorney General Letitia James said in a statement. Her California counterpart, Xavier Becerra, said the new rule is creating a “loophole” for bad actors.

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