California law banning triple-digit interest jeopardized by federal ‘loopholes,’ lawsuit says

A year after California passed a law to crack down on lenders charging triple-digit interest rates, Attorney General Xavier Becerra announced a lawsuit against a federal agency to block a new rule that would let certain banks and lenders avoid the state cap.

The new law, Assembly Bill 539, aimed to end last year a decades-long practice of charging borrowers who take out loans between $2,500 and $10,000 interest rates that can exceed 200%.

The state’s new regulation was born from years of debate and eventual “compromise” between lenders and consumer advocates who agreed to cap interest rates at 36%.

The Office of the Comptroller of the Currency under the U.S. Department of the Treasury proposed a rule late last year that would let non-bank lenders purchase high-rate loans from national and federally chartered banks without having to then lower the interest in accordance with state law.

Critics say the strategy allows “rent-a-bank” arrangements, which Becerra, Illinois Attorney General Kwame Raoul and New York Attorney General Letitia James allege in their complaint are “designed to evade state law.”

“As the Trump Administration opens the door to predatory lending, we’ll work to close it by taking them to court,” Becerra said in a statement.

The attorneys general are arguing that “excessive” interest rates “make it difficult or impossible for many borrowers to repay their loans in full, which in turn causes borrowers to fall deeper into debt.”

The lawsuit, filed Wednesday in the United States District Court for the Northern District of California, also claims the currency office does not have regulatory power over non-bank entities.

The currency office has argued its rule clarifies legal ambiguity and helps “facilitate responsible lending by banks.”

“Consistent with the proposal, this regulation addresses that legal uncertainty by clarifying and reaffirming the longstanding understanding that a bank may transfer a loan without affecting the permissible interest term,” the currency office wrote in its rule summary. “Based on its supervisory experience, the OCC believes that unresolved legal uncertainty about this issue may disrupt banks’ ability to serve consumers, businesses, and the broader economy efficiently and effectively,particularly in times of economic stress.”

Assemblywoman Monique Limón, D-Goleta, said last year that her bill would help end lending practices that disproportionately target low-income communities of color.

“Once again, the OCC under this federal administration has attempted to overstep its bounds, and states must stand up for their legal rights to enact policies that protect consumers,” Limón said Wednesday. “The OCC has a history of taking illegal administrative actions. I am hopeful that the courts will recognize the OCC proposal for what it is: an attempt to sidestep Congress in an arbitrary and capricious manner that would ultimately allow predatory lenders to evade state consumer protection laws.

This story was originally published July 29, 2020 at 12:50 PM with the headline "California law banning triple-digit interest jeopardized by federal ‘loopholes,’ lawsuit says."