September 3rd, 2020
The National Community Reinvestment Coalition
740 15th St. NW
Washington, DC 20005
Acting Comptroller of the Currency
400 7th St SW
Washington, DC 20219
Re: Comments on Proposal “National Banks and Federal Savings Associations as Lenders” Docket ID: OCC-2020-0026 RIN 1557-AE97
Dear Mr. Brooks:
We strongly oppose the Office of the Comptroller of the Currency’s (the “OCC”) proposed rule, and we fear that if codified, it would introduce high-cost credit to our communities, with the inevitable result of harming the financial health of vulnerable households.
The OCC contends that, as currently situated, the lack of a national standard for the true lender doctrine creates regulatory uncertainty, and as such, it feels compelled to force a federal intervention through pre-emption.
The OCC has emphasized the need for “bright line” clarity while ignoring the weight given to regulatory flexibility, nuanced judgment, and agility in the face of innovation.
The true lender doctrine is a legal concept endowed with the agility to keep pace with innovation in the marketplace. In an era of rapid innovation in financial services, the true lender doctrine is notable for its adaptability to reinvention. It allows a court to use its judgment when probing the substance of a partnership between a bank and a non-bank lender that may exist to evade state law. With the doctrine, courts can consider various factors to determine which entity is the actual, and not merely the nominal, lender in a configuration. The true lender doctrine is the right tool for these times.
How regulators oversee partnerships between “fintech lenders” and traditional banks might be perceived by some to be of only a minor concern, but it is a significant question. In part, the sheer growth in the usage of these products underscores this viewpoint. In 2018, TransUnion reported that 38 percent of all non-credit card unsecured personal loan balances were held in accounts at fintech lenders – up from just five percent as recently as 2013, with an average debt of more than $8,000. The quantity speaks of the relevance of this market to our economy, making it all the more concerning that these loans bear such high interest rates. Claims that fintechs can meet the needs of a “new middle-class” that is plagued by both a lack of savings and a tendency for volatile month-over-month income flows are not entirely honest, as it is hardly right to view the arrival of a new supply of credit as a “win-win” when in fact, consumers now engage in a credit system that shows signs of being far more predatory.
The OCC’s Proposed Test Is Poorly Conceived, and Will Invite Evasions
Historically, courts have looked beyond the form of a lending arrangement by scanning a partnership for its true nature. The focus on who functions as the key source of capital has worked – and support for this perspective has come from many voices.
We look back to the wisdom expressed by John Marshall in 1835 when he wrote:
The ingenuity of lenders has devised many contrivances by which, under forms sanctioned by law, the statute may be evaded…If giving this form to the contract will afford a cover which conceals it from judicial investigation, the [usury] statute would become a dead letter. Courts, therefore, perceived the necessity of disregarding the form, and examining into the real nature of the transaction… Though this principle may be extracted from all the cases, yet as each depends on its own circumstances, and those circumstances are almost infinitely varied, it ought not to surprise us if there should be some seeming conflict in the application of the rule by different judges. Different minds allow a different degree of weight to the same circumstances.
Marshall called for a system that would empower the courts in an area prone to be uncertain and unceasing.
The test proposed by the OCC, on the other hand, prioritizes form over function. It is less of a tool to filter out evasions and more of a set of guide rails to instruct individual lenders on how to structure their partnerships to qualify for pre-emption. It is also the case that the OCC’s proposed standard is undoubtedly permissive and would have the effect of rubber-stamping virtually all potential partnerships that involve banks and non-bank lenders.
To quote from the text of the proposed rule: “The proposed rule would provide that a national bank is deemed to make a loan if the institution, as of the date of the origination:
- is named as the lender in the loan agreement, or
- funds the loan.”
The OCC’s true lender standard applies a purely nominal test to regulation, with the effect of thwarting courts’ freedom to use common sense. The OCC has chosen to use an overly simplistic method, focusing only on two discrete steps in loan origination, while ignoring many other elements of the loan process.
Such a standard would allow all of the current lending partnerships to remain viable. Indeed, this test does more than create certainty in the marketplace. It has the effect of providing bright-line guidance for overcoming any effort of state legislatures to instruct their courts on a method to protect their residents from usurious lending. While in the paraphrased words of John Marshall, it stops the need for “ingenious lenders to devise new contrivances,” it locks in current evasions.
The next chart shows what evasion looks like in today’s marketplace. It lists interest rate caps in states that meet two criteria: first, these states have put in place interest rate caps on unsecured installment loans for state-licensed lenders, and second, they are states where Elevate Credit (“Elevate”) makes Rise loans through partnerships with a bank to avoid state licensure and state interest rate caps:
Currently, Elevate offers Rise in 16 states through bank partnerships and in 13 states directly. It does not make loans in 21 states or the District of Columbia.
In our opinion, Elevate provides credit to many people who do not have the “ability to repay” their debts. Historically, Elevate has spent between $250 and $300 to acquire customers, creating a system that only remains profitable by charging very high rates. Their most effective advertising channel is direct mail – a method where borrowers do not have full information on other credit alternatives. As if to underscore the problems in the online lending space, Elevate also reports that between 17 and 20 percent of its loan portfolio is charged-off. Of course, Elevate accepts that result, as evidenced by the fact that its contract with the entity (Elastic Special Purpose Vehicle, Inc.) that holds its loans after origination agrees to that performance level. Similarly, online lender Enova recorded $1.036 billion in charge-offs of its outstanding loans over 2018 and 2019.
Pre-emption Has Facilitated Abusive Products Before
In the late 90s and early 2000s, a handful of banks established evasive partnerships with payday lending stores. With the implicit cooperation of two national regulators, member banks made their charters available to payday lenders. The banks participated in schemes that made credit possible at usurious rates. When defined by the average cost on a store-by-store basis, prevailing rates were highest in states where payday lenders relied on bank partnerships.
The willingness of federal regulators to permit “rent-a-charter” partnerships established the grounds for high-cost payday lending. Partnerships between payday lenders and OCC-regulated banks included:
- Goleta National Bank, an OCC-regulated bank from California, partnered with ACE Cash Express. Although Georgia considered loans above 58 percent as usurious, ACE made loans at 442 percent.
- Eagle National Bank, an OCC-regulated bank from Pennsylvania, partnered with Dollar Financial Group, Urgent Money Service, Express Money Service, and Fast Loan. Dollar’s subsidiary Money Mart charged $17.50 to borrow $100 in Virginia, despite the presence of a 36 percent interest rate cap in the Commonwealth.
- People’s National Bank, an OCC-regulated institution from Texas, partnered with National Cash Advance. At the time, Pennsylvania capped interest rates at 23.75 percent, but National Cash Advance charged $17 to borrow $100 for up to two weeks – an APR of 442 percent.
Five FDIC-regulated institutions participated in similar partnerships with lenders, including nationwide lenders Advance America, Check ‘n Go, and EZPawn. County Bank of Rehoboth Beach (Delaware), a financial institution regulated at the time by the Office of Thrift Supervision, maintained partnerships with more than twenty online payday lenders.
The empirical evidence suggests that the use of pre-emption power created the worst of all outcomes: not only did it facilitate lending at rates far beyond those permitted by states, but interest rates were higher when lenders took advantage of pre-emption. According to a 2001 study in 31 states, interest rates in 6 states where pre-emption was applied were 160 percentage points higher than in those where state law authorized payday lending.
States Continue to Make Effective Use of the True Lender Doctrine
Courts have found many ways to make use of the true lender doctrine to prevent evasionary partnerships. In this section, we will demonstrate the flexibility of the doctrine by showing how it has served both federal and state regulatory agencies in their approach to making determinations on partnerships between a multiplicity of regulated entities (banks, non-banks, and tribal lenders), and in a variety of states.
Georgia was the first state to enact a law to determine whether a non-bank in a partnership with a bank was the de facto lender based upon a review of the totality of the circumstances in applying state usury laws.
The common law evolved with state courts applying similar true lender tests, including the first case brought by the New York Attorney General’s office against a bank for violating state consumer protection laws. In 2003, in Spitzer v. County Bank of Rehoboth Beach, the New York Attorney General used its own “totality of the circumstances” test to conclude that two payday lenders were the true lenders in a partnership, and not their bank partner, County Bank of Rehoboth Beach. Spitzer outlined his rubric:
The State contends that while County Bank is the lender in name, Cashnet and Telecash in fact provide the capital for, market, advertise, originate, service, and collect payment of the loans. It alleges that Cashnet and Telecash pay County Bank an annual fee to use County Bank’s name and charter to make loans, pay County Bank a small percentage of the finance charge received on the loan, and agree to indemnify County Bank for losses and liabilities arising out of the loan operation, while County Bank itself, because it receives all principal plus part of the finance charge from Cashnet and Telecash within twenty-four hours of the loan’s origination, shares none of the risk.
The payday lenders involved in this relationship performed all of the meaningful operational aspects of lending, put their capital at risk, and transformed lendable cash into receivables in approximately one day. From that same case, a guiding principle for identifying the true lender was adopted, wherein courts would examine partnerships for “who had the predominant economic interest” in the loan. It was a “follow-the-money” approach.
Many other states have pursued cases against other partnerships, including in West Virginia, where it identified CashCall, a non-bank payday lender, as the true lender and not the bank partner (First Bank & Trust) that it was using at the time.
- CashCall developed all of the marketing materials as well as the accounting and loan tracking systems.
- CashCall paid First Bank & Trust a starting incentive, for the cost of FB&T’s legal reviews, and monthly fees of between $30,000 and $200,000 to maintain the relationship.
- CashCall received the applications, verified the identities, and established the lending guidelines.
- CashCall deposited no less than $1.5 million or an amount equivalent to the two highest days by loan amounts in the previous 30 days from which FB&T would distribute loan proceeds.
- In no more than 72 hours, CashCall would buy back the loans, replenish the reserve account, and pay a premium on the loan balance’s face value.
- CashCall serviced the loans.
FB&T was indemnified of any risk and received guarantees for income streams.
Recently, the District of Columbia focused on economic interests to assert that a non-bank was the true lender in a partnership with Republic Bank of Kentucky.
The DC case demonstrated dramatically why a non-bank would want to ignore state law. Elevate engaged in making two types of loans, each at rates that were substantially beyond the District’s relevant rate limits. According to the complaint, Elevate offered a line of credit and an installment loan bearing rates of between 99% in partnership with Republic Bank & Trust (Kentucky) and 251% with FinWise Bank. Racine added that 2,551 DC residents took out credit, even though the rates were up to 42 times the District’s respective interest rate caps.
When CashCall pivoted to a new lending arrangement – in this instance with a non-bank tribal partner – the true lender test still worked. In Consumer Financial Protection Bureau v CashCall, Inc., the CFPB contended that CashCall, and not its newly-embraced partner (Western Sky) was the true lender because:
- a) CashCall funded a reserve account with a balance equivalent to two days of loans.
- b) Purchased all of the loans back from the tribal partner.
- c) Paid a premium on the face value of each loan.
- d) Provided guarantees and administration fees as part of its commitment to the tribal entity.
- e) Took all of the risks when it indemnified the tribal partner.
As in the prior case against CashCall in West Virginia, the entity putting capital at risk in this partnership was CashCall. That determination, made from a review of the facts, led the court to “pierce the veil” behind the collaboration and recognize CashCall as the lender because – as in a string of other cases involving other unrelated partnerships – it had the “predominant economic interest” in the lending.
The CFPB’s case demonstrated how a PEI approach could work in lending arrangements involving diverse types of financial entitites because in this instance, it involved a partnership with a non-bank state-licensed business and a tribal lender. The test worked – even when a bank was not involved.
The OCC claims that the regulatory playing field needs intervention, but it is not just state regulators who disagree. It is also the case that other federal regulators have found it workable.
Yet They Persist
In noting the ingenuity of some lenders to derive “contrivances,” the prescience of John Marshall continues to be proven to this day. In 2020, we can see how skilled the architects of these partnerships can be when they seek to evade state laws’ reach. Currently, Elevate and Republic Bank of Kentucky partner to issue the Elastic Line of Credit, the loan portfolio’s benefits or costs are not felt by Republic. Republic sells back between 90 and 95 percent of the portfolio through a “loan participation” agreement. Elastic Special Purpose Vehicle, an entity with a direct financial relationship to Elevate, purchases the loan participation rights.
The use of a loan participation agreement is regulatory hypnosis. A loan participation interest is a contractual right to receive the economic benefits of a portfolio of loans. Elevate sells the participation rights – rather than the loans themselves – as a new iteration (innovation) to create a “contrivance” that obscures the true nature of the lending relationship. It is one more way that the entity with the actual interest in the loan is not the same as the entity whose name appears on the loan contract, or the entity that sends the funds electronically (via the ACH system) to the borrower. Elevate offers the Elastic line of credit in forty states. Presumably, courts in the other ten states have written their laws in a manner that can thwart this tactic, but most have not.
If the OCC usurps the authority to determine the true lender in these partnerships, it could undermine states’ power to enforce consumer protection laws within their jurisdictions. Also, there will likely be state legal challenges to any federal action, which will divert regulatory resources to litigation instead of protecting consumers.
Third-Party Relationships Hold the Potential to Create Reputational Risk
When the OCC put forth this proposed rule, it may have failed to account for how it could introduce risks to our national banking system. The provision of very high-cost credit seems destined to provoke negative public opinion, as there are profound concerns held by many people and institutions about lending money at high interest rates. For centuries, institutions have raised concerns about the lending of money at unreasonably high rates of interest. The idea of usury – and the need to create laws to thwart it – reaches back to civilization’s formative stages.
In the late 90s and the earlier part of the 2000s, rent-a-bank relationships flourished, primarily between smaller financial institutions and non-bank payday lenders. For some smaller banks, the fee income from small loans represented a significant share of their overall revenues and an even greater share of their profits. When regulators published a set of guidances that put these partnerships under greater scrutiny, banks chose to sever their agreements with payday lenders.
At the time, regulators held that banks would have to shield themselves from risks, including not just credit risks but also reputational ones, if they were to continue with such arrangements. That created tension, because with each step that a bank took to shift risk away from itself and to the non-bank partner, the grounds for the non-bank to avoid being classified as the true lender became weaker and weaker. Therein lies one of the virtues of a meaningful true lender test: with each additional step that a bank takes to avoid the appearance of evasion, the bank pulls back from actually engaging in evasions. Conversely, if a bank takes on the risk of holding high-risk loans (see the 17 to 20 percent default rates at Elevate) on its balance sheet to justify grounds for pre-emption, it exposes itself to greater regulatory scrutiny of its financial health.
Yet now we have a regulator who has proposed to take precisely the opposite approach – ignoring entirely where risk exists. Beyond the glaring reputational risk, these kinds of third-party arrangements inevitably create operational risk (the “rogue” employee) and strategic risk from inaccurate information in underwriting or identity verification. The blindness in this proposal stands in contrast to past views. Reputational risk has always been an essential element of the OCC’s analysis. Indeed, history bears out why it is an essential factor to consider. In the period after the Great Recession, it became evident that the banks who were willing to trade on their public reputations were also the ones that were most likely to fail, underscoring how the public’s perception of a bank’s business practices is a harbinger of the future. The idea that a regulator would “lean into” reputational risk is concerning.
The OCC Has Not Followed Appropriate Procedures
The OCC should have sought to determine the benefits of the change, precisely how it would address regulatory uncertainty, and if there were negative consequences for consumers and small businesses. We believe that the OCC has not honored procedural requirements.
In the proposed rulemaking, the OCC contends that state ‘true lender’ laws create “uncertainty about the legal framework that applies to loans” made through partnerships, but it provides no empirical data to support that statement. By law, the OCC must seek evidence, along with other precedents, to provide a basis for the expansion of its pre-emption power, and it must also consult with the Consumer Financial Protection Bureau when making such a “case-by-case” determination. Despite those guiderails, the OCC has chosen to start with a proposal for a final rule.
Under existing regulations, the OCC should consider “the impact of a particular State consumer financial protection law on any national bank that is subject to the law or any other State with substantially equivalent terms.” Moreover, the following clause of the same statute (B) requires that the OCC must consult with the CFPB and “take the views of the Bureau into account when making the determination.
The OCC does not have the grounds to apply its pre-emption power. The Dodd-Frank codified this limited view of pre-emption previously held by the US Supreme Court in Barnett Bank of Marion County, NA v. Nelson. The OCC has not provided any record to demonstrate that state consumer protection and civil rights laws meet the Dodd-Frank pre-emption requirements. It must specifically address each state law that it asserts is preempted and substantiate that the state law meets the Barnett Bank standards. So as a matter of substance and also process, the OCC’s proposed rule cannot stand. The OCC is only supposed to intervene when there is a “significant” reason to do so. The proposed rule conflicts with a federal statute, specifically the Dodd-Frank Act, which limited pre-emption of state laws by national banks to only those state laws that prevent or significantly interfere with national banks’ powers..
This proposed rule is not the first time the OCC has attempted to intervene in ways that obstruct states from enforcing their consumer protection laws. It did so during the last recession when it claimed that states did not have the rights to enforce state consumer protection laws against national banks. The Supreme Court rejected that position in Cuomo v. Clearinghouse Association. The new wave of actions by the OCC disregards Supreme Court precedent and the express Congressional mandate in the Dodd-Frank Act that federal regulators’ ability to preempt state law enforcement should be narrowly applied – and only if the agency asserting pre-emption creates a substantial record in support of pre-emption. Along with the “Madden-fix” rule (which expands the ease of transferring a national bank’s power to export terms) and the OCC’s proposed Fintech charter (which expands the scope of institutions that can claim federal pre-emption), the OCC’s proposed true lender rule greatly expands the notion of where institutions are entitled to assert federal pre-emption and improperly limits the ability of states to enforce consumer protection and civil rights laws.
Of course, legal issues aside, there is also a question of timing. At a time when so many households face economic uncertainty, is there an urgency to push the boundaries on the provision of high-cost credit? If we know that a racial wealth gap exists in our country and we observe that persons of color are more likely to use high-cost non-bank credit, should regulators hasten to let high-cost lenders find more customers for their wealth-extracting debt?
Given the demonstrated willingness of some non-bank lenders to look for loopholes in any rule, leaving the true lender doctrine to state courts makes the most sense. Past actions by courts have interfered with lending that, by all accounts, deserves to be treated as harmful. It stands to reason that leaving the true lender standard “as is” will reduce a type of lending that should be thwarted: ultra-high-cost lending. There is no justification for any regulatory “safe harbor” here. Consumers will fare better if the federal banking regulators leave the true lender doctrine alone.
We urge the OCC to withdraw its proposal.
Please reach out to me or Adam Rust (firstname.lastname@example.org) if NCRC can provide any additional commentary or offer clarification on our comment.
Jesse Van Tol
National Community Reinvestment Coalition
 TransUnion (2019). “Fintechs Continue to Drive Personal Loan Growth.” https://bit.ly/2QokMKt
 Elevate Center for the New Middle Class. 2016. “Non-Prime Americans: Daily Life.” https://bit.ly/3jbOUEY
 JPMorgan Chase Institute. 2019. “Weathering Volatility 2.0; A Monthly Stress Test to Guide Savings. The report notes that “income volatility remained relatively constant between 2013 and 2018. Those with the median level of volatility, on average, experienced a 36 percent change in income month-to-month during the prior year.” https://bit.ly/3jeNrhk
 NCLC for state rate caps on two-year, $2,000 loans, and risecredit.com for interest rates.
 Elevate Credit. 2020. 2019 Annual Report. https://bit.ly/3bb16U1 From 2006 to 2011, principal losses as a share of originations fluctuated between 17 and 20 percent. Total charge-offs, net of recoveries, were $570.7 million and $466.4 million in 2019 and 2018.
 Consumer Federation of American and the US Public Interest Research Group. November 2001. “Rent-a-Bank Payday Lending: How Banks Help Payday Lenders Evade State Consumer Protection Laws. https://bit.ly/2D1AZlH
 12 USC. 25b(b)(3)(A) and (B)
 517 USC 25 (1996).
 12 U.S.C. section 25b(b)(3)(A).
 Barnett Bank of Marion County, NA vs. Nelson.
 12 U.S.C. section 25b(b)(1)(B)
 557 US 519 (2009)
 Morgan, Donald and Kevin J. Pan. 2012. “Do Payday Lenders Target Minorities?” Liberty Street Economics, Federal Reserve Bank of New York. https://nyfed.org/34Xzy3b information on payday credit usage comes from the Federal Reserve’s Survey of Consumer Finances (SCF), a triennial, nationally representative survey of about 4,400 households. The 2007 survey, the latest available, is the first SCF that asked about payday credit usage. In their introduction, the authors state their conclusion: “We look at whether black and Hispanic households are in fact more likely to use payday credit. We find that, unconditionally, they are.”