Just before the holiday season last year, the Center filed an amicus brief on behalf of Professor Adam J. Levitin of Georgetown Law in People of the State of California, et al. v. The OCC to support a challenge to the OCC’s “valid-when-made” rule. The rule — if allowed to stand — will deliver a potentially devastating blow to state interest rate caps by allowing national banks to make loans at any interest rate and then transfer those loans (and interest rates) to state-regulated nonbank lenders.
The valid-when-made rule allows unscrupulous lenders to evade state usury laws aimed at preventing financial harm to borrowers. The National Bank Act, as interpreted by the U.S. Supreme Court, provides that national banks may provide loans at rates that exceed state interest rate caps. Under the valid-when-made rule, those banks can now sell those loans to state-based nonbank entities which could not make such high-interest loans themselves. These “rent-a-bank” schemes have been used by payday lenders and others in the past to avoid usury laws by funneling loans through national banks. Essentially, the OCC rule makes it easy for nonbanks to make predatory, high-interest loans to consumers.
Professor Levitin’s friend-of-the-court brief argues that the OCC’s rule should be struck down because it would “create a regulatory vacuum in which high-cost nonbank lenders will be free to prey upon consumers without regard for either state usury laws or federal regulation.”
Professor Levitin’s brief details why the rule is illegal. First, it outlines the extent to which the rule is inconsistent with the history of the common law that was incorporated into the National Bank Act. Next, the brief notes the OCC’s failure to consider consumer protection concerns when promulgating the rule. Finally, the brief argues that the OCC failed to comply with National Bank Act procedural requirements and that the stated justification for the rule is not supported by evidence.
Laws against usury are among the oldest laws on record. States have employed them in regulating consumer credit since colonial times. The OCC’s hostility to efforts to rein in predatory lending ill behooves an agency charged with protecting the public. The Center is pleased to have helped in Professor Levitin’s effort to restore balance.