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Trump Administration Declares Open Season on Consumers for Subprime Lenders

posted by Adam Levitin
The Trump administration has just proposed a rule that declares open season on consumers for subprime lenders. The Office of Comptroller of the Currency and the Federal Deposit Insurance Corporation (on whose board the CFPB Director serves) have released parallel proposed rulemakings that will effectively allowing subprime consumer lending that is not subject to any interest rate regulation, including by unlicensed lenders.
The proposed rule provides that nonbank assignees of loans from banks may charge whatever interest rate the bank may charge. This is a regulatory implementation of the so-called “valid-when-made” doctrine, a spurious modern invention that has been rejected by the only federal court of appeals to address it

The rulemaking green lights unregulated subprime lending nationwide. In particular, allows unregulated payday lending (although it also applies to title lending, installment lending, etc.). Currently payday loans are allowed in only about half of the states, and the other half all strictly regulate it, including through restrictions on finance charges. 

The level of finance charges allowed in permissive states is frequently criticized by consumer advocates, but it is important to recognize that payday lending is not unregulated in any state in which it is allowed.  The Trump administration’s proposal would allow payday lenders to make loans in every state without regard to state usury laws (or state licensing requirements and thus enforcement of other state consumer protection laws)…just as long as those lenders partner with a bank.  
These bank partnerships are often called “rent-a-bank” arrangements, for that is truly what is going on. Bank charters are not easy to obtain, and they come with certain privileges, including exemption from state usury laws (I oversimplify here). In a rent-a-bank arrangement, the bank serves as the formal lender—that is the bank will be the creditor on the loan—but the non-bank partner will generally do everything of substance with the loan:  it will market the loan product and prospect for customers, it will underwrite the loan (or license the underwriting software to the bank, which will exercise almost no discretion in using the software), it will service the loan, and it will be either the assignee of the loan or will purchase a derivative interest in the loan.  In other words, the bank will let the non-bank use its exemption from state usury laws for a fee.  Depending on how the partnership is structured, neither the consumer nor state regulators would even be able to tell that there was a non-bank acting as the true lender on the loan. 
Rent-a-bank relationships are shams, plain and simple. There are certain types of partnerships with nonbank that make a lot of sense for banks: for example, co-branded credit card. But there is zero business reason for banks entering rent-a-bank lending relationships other than to earn fee income without incurring credit risk. The banks are essentially collecting money from facilitating loans they they would never consider making themselves. That’s why one doesn’t see 50-50 joint venture lending relationships with non-banks. Instead, the nonbank will take all or nearly all the credit risk on the loans. There is some risk for the bank in such an arrangement however—what if the non-bank fails to honor its obligation to purchase the loans?  The bank will be stuck with a bunch of loans that it doesn’t want and that it did not underwrite to its own specifications. That risk is precisely why the FDIC has previously issued guidance to banks warning of the risks of third-party payday lending partnerships and why the FDIC has even brought enforcement actions against banks engaged in rent-a-bank activities with subprime lenders.   
Let me be clear: the issue here is not whether payday lending is generically a good or bad thing. Nor is the issue whether consumers should be allowed to borrow at 300% or 400% APR. Instead, the issue here is whether unregulated payday lending is desirable. The Trump administration’s rulemaking does not substitute a federal usury cap for state caps. Instead, it says “no cap.” There is virtually no type of unregulated consumer lending allowed in the United States.  It has long been an unstated consensus that all consumer lending is subject to a certain modicum of regulation. The policy debates have all been about the level of regulation, not the existence thereof. The Trump administration’s rule would change that. 
Now I recognize that the administration’s defenders will argue that OCC and FDIC are passing a broad rule, but that they retain substantial ability to oversee bank partnerships and rein in any abusive behavior. Except that they won’t, and everyone knows it. The OCC and FDIC raced into court to defend a rent-a-bank loan in Rent Rite Super Kegs West Ltd. v World Business Lenders LLC, despite the loan coming from a community bank with a history of consumer financial law compliance problems. If the OCC and FDIC were truly concerned about rent-a-bank, they would have clearly carved it out in this rulemaking. That they didn’t says everything you need to know. 
The good news here is that the legal authority for the rulemaking is dubious, and the rule will be vigorously challenged in court. In any event, until the litigation challenge is cleared up, a non-bank lender would be taking a big risk by engaging in rent-a-bank lending. (The rulemaking also does not address "true lender" doctrine attacks on rent-a-bank relationships, but given the lack of state visitorial powers over banks and the possibility of non-banks being unlicensed, true lender doctrine will inevitably result in underenforcement.) And it may well be that we are looking at a different administration and different OCC and FDIC and CFPB leadership by the time any litigation is resolved.  
Irrespective of how this issue ultimately plays out, let’s recognize it for what it is: the ultimate DC swamp move. There are several thousand banks in the United States. Almost none of them engage in rent-a-bank partnerships. They know it is inconsistent with safe-and-sound operations, and they know that it is not the right thing to do for consumers and small businesses. The entire push for valid-when-made is coming from non-banks and the handful of bad actor banks that engage in rent-a-bank partnerships. These are some of the same folks who have been pushing for a “fintech” charter. And yet this distinct minority within the financial services industry is what is driving the Trump administration’s agenda. Of course, another way of seeing things is that OCC is just back to its old tricks, such as in the 1990s and 2000s, when it waged a war against state consumer protection regulations that contributed significantly to the mortgage bubble and financial crisis. Either way, it's a heckuva job OCC's doing protecting our financial system and the consumers who use it.


Usury laws are the simplest and most effective way to prevent Dracula loans from being made. Yes, it is true that usury laws will push some lending to those folk who view kneecaps as acceptable collateral. But at least they can't advertise on teevee or the Internet, or keep a storefront.

If I were king of the world, I would put a fairly tight usury limit on everybody but special-purpose non-profit lenders. Being non-profit does not guarantee virtue. But given the way modern capitalism works, for-profit consumer lending is a guarantee of vice, except maybe to strong consumers. (I wouldn't put the government in the lending business, because they are very poorly suited to be in the loan collection business. Note that the Bank of North Dakota participates in loans, but doesn't originate or collect them.)

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