Speevr |

Bank regulator’s True Lender Rule undercuts bank regulatory protections and shelters predatory lending

A recent rule by the Office of the Comptroller of the Currency (OCC), a federal bank regulator, threatens to upend the rights and responsibilities between banks and their nonbank lender partners, displacing state regulators and subjecting consumers to predatory loans. The U.S. Senate has already, with a bipartisan vote, passed legislation to rescind the rule, using a mechanism called the Congressional Review Act (CRA). The House of Representatives is scheduled to vote on the measure this week to do the same, which would then send the legislation to the President’s desk for final approval. Passing this measure is needed to protect consumers and to preserve long-standing precedent permitting states to enforce their laws.

Banks regularly enter into partnerships with nonbank entities in carrying out their operations and providing services to customers. However, some nonbank lenders have attempted to use banks as vehicles to evade state laws, since banks are typically exempt from certain state laws by virtue of federal preemption. Some nonbanks have added the name of a bank to their loan documents and then claimed they are entitled to the bank’s preemption rights over state regulation and consumer protection laws, including usury limits.
This reached a peak in the early 2000s when some states moved to prohibit 400% interest payday loans. Some payday lenders responded by entering into agreements whereby they paid a small fee to a few banks to add their names to the loan documents and claimed preemption from these state laws. They combined this with mandatory arbitration clauses that effectively prevented consumers from being able to challenge these arrangements in court. Eventually, state regulators and attorneys general joined with federal regulators to shut down these arrangements. They won by utilizing legal precedent, dating back to at least 1825, that courts look at transactions to determine who was the true lender – the party with the predominant economic interest — and that state laws apply to the loan if the true lender was not a bank with preemption rights. At that time the OCC was adamant that preemption rights were not something that banks could lease out to nonbank entities for a fee. This shut down these so-called “rent-a-bank” schemes, and state laws were again enforced against these nonbank lenders.
In recent years, lenders have again sought to use these bank partnerships to avoid state regulation and laws. Last October, the OCC reversed its prior position by issuing a rule that seeks to displace this longstanding law by both asserting that the OCC has authority to override the court true lender doctrine and enacting a standard that would specifically grant preemption rights to nonbank lenders if they merely put the partner bank’s name on the loan document.
This rule would upend the current bank regulatory system without a coherent alternative. It would grant nonbank entities sweeping preemption without the chartering requirements or oversight requirements of banks.
Defenders of the rule claim the OCC will prevent banks from enabling predatory loans. The track record shows otherwise. One op-ed defending the OCC states that the “OCC has shown itself willing to bring enforcement actions against banks that fail to exercise proper control.” The author provides a link to two enforcement actions, which were both taken nearly two decades ago. However, there are several high-cost rent-a-bank schemes that the OCC – and the Federal Deposit Insurance Corporation (FDIC) – have allowed to operate for the past few years while ignoring repeated entreaties from Congress, state officials, and consumer advocates to enforce the law.

During a recent congressional hearing, the former acting comptroller who issued the rule could not point to any enforcement actions when asked by Senator Elizabeth Warren (D-Mass.). The senator referred to the experience of a married couple who owned a small restaurant supply distributor in Massachusetts. They are immigrants, with a limited knowledge of English, who took out a loan with a 92% annual interest rate, well above Massachusetts’ usury cap of 20% that applies to nonbank lenders in the state. The non-bank World Business Lenders arranged the loan, set the terms, and collected the payments even though the name Axos Bank, an OCC-supervised bank, was on the loan document. The couple had to sell their house to get out from under the loan.
Similarly, a restaurant owner in New York is facing foreclosure as a result of a loan at 268% annual interest from World Business Lenders, which again is using the name of Axos Bank.
The FDIC and OCC have also made clear what they view as acceptable lending by jointly filing an amicus brief defending a rent-a-bank loan of $550,000 at 120% interest to a small business in Colorado, where the state has a rate cap far below that.
More broadly, the OCC has a long history of preempting state consumer protection law to the detriment to consumers and the economy, most notably in the run-up to the 2008 Financial Crisis. In recognition of this harm, the Wall Street Reform Act of 2010 “curtailed its power to preempt state laws, especially as to nonbank entities….”
Another claim by defenders of the rule, made recently on the U.S. Senate floor, is that banks in these partnerships would have to “assess a borrower’s ability to repay before making the loan” or “face serious consequences from their regulator….” The existence of around a dozen ongoing partnerships with loans near or far exceeding triple-digit interest rates indicates that unaffordable loans are being made without repercussions. So the evidence does not support that federal regulators will prevent an explosion of predatory schemes likes these should the OCC’s rule remain in place.
Abundant research from California, SEC filings, and elsewhere show that consumers are more likely to default on high-interest loans. High-interest lenders often target Black and Latino communities with products that pull people into financial quicksand. These loans are not responsibly underwritten, as a credit union in the deep south analyzed rent-a-bank loans taken out by their members and documented “a clear disregard for borrowers’ ability to repay.”
Nearly every state has an interest rate cap. These limits are seriously undercut by the OCC rule, so it’s unsurprising that state officials are pushing back. Eight state attorneys general have sued over the rule, which was hastily proposed and approved in just 100 days. The District of Columbia attorney general has sued nonbank lenders trapping his constituents in debt through rent-a-bank loans. He has alleged that OppFi and Elevate “misleadingly marketed high-cost loans” they made to thousands of D.C. residents.
A letter calling for Congress to rescind the rule was signed by a bipartisan group of 25 state attorneys general. The Conference of State Bank Supervisors (CSBS), which represents Republican and Democratic officials, sent Congress the same message, saying “the OCC should not erode state consumer rights and protections, particularly when it refuses to follow the process mandated by Congress to preempt those protections.”
The Biden administration has announced its support for the CRA resolution to repeal the rule, noting its harm to financial regulation and consumers. The House of Representatives now has an opportunity to help protect consumers by approving the measure and sending it to the President’s desk for his signature.
The author did not receive financial support from any firm or person for this article or from any firm or person with a financial or political interest in this article. They are currently not an officer, director, or board member of any organization with an interest in this article.

Africa in the news: COVID-19, Côte d’Ivoire, and energy updates

COVID-19 cases surge in Africa, and Tanzania takes steps to join COVAX
Reported COVID-19 cases are surging across Africa, with more than 20 countries experiencing an increase in week-over-week case count by over 20 percent. On June 17, the World Health Organization’s (WHO) regional director for Africa attributed the spike in cases to a third wave of the virus sweeping across the continent and warned about increased risk of overwhelming Africa’s underdeveloped health care system. Five countries—South Africa, Namibia, Uganda, Tunisia, and Zambia—now account for 76 percent of the continent’s confirmed new cases. Efforts to accelerate inoculations are slow, and only 0.79 percent of Africans are fully vaccinated, as the continent’s access to vaccines has slowed due to financing and competition for vaccine supplies with wealthier nations.

In related news, on Thursday, Tanzania, which remains 1 of 4 African countries to not yet begin a national vaccination drive, announced it is seeking to join COVAX—the global vaccine-sharing initiative hosted by the WHO, the European Commission, and France. Since the death of Tanzanian President John Magufuli, who had firmly denied the spread of the virus in the country, the government has instituted measures to contain the pandemic . Joining the COVAX initiative promises to bring COVID-19 vaccines to Tanzania in the coming weeks. However, international agreements to supply COVAX with vaccines have fallen short, as India, a major manufacturer and supplier of the immunization, prioritized inoculating its population as it battled a brutal second wave of the pandemic.
Gbagbo returns to Côte d’Ivoire; US Supreme Court dismisses lawsuit
On Thursday, former Côte d’Ivoire President Laurent Gbagbo returned to the country for the first time since his arrest 10 years ago. The former president, who had been in power for nearly a decade, was arrested in 2011 and sent to The Hague to await trial in the International Criminal Court (ICC) after 3,000 people were killed in the aftermath of his 2010 electoral defeat. Gbagbo, the first head of state to be tried by the ICC, was charged with war crimes and crimes against humanity, but the ICC acquitted him in 2019—a ruling that was upheld in March of this year. Although some of his former opponents argue Gbagbo should be imprisoned in Côte d’Ivoire, the government has welcomed his return, citing the need for reconciliation in a country not far removed from a civil war.
In other Ivorian news, the U.S. Supreme Court threw out a lawsuit on Thursday that accused Cargill Inc and Nestle of knowingly helping perpetuate slavery at cocoa farms in Côte d’Ivoire. According to Reuters, the Supreme Court’s 8-1 ruling reversed a lower court decision that allowed the lawsuit brought on behalf of child slaves from Mali who worked on said farms. The Supreme Court indicated that the case lacked evidence that the defendants committed the alleged wrongdoings on U.S. soil.

Figure of the week: Increasing access to electricity in sub-Saharan Africa

This month, the custodian agencies of Sustainable Development Goal (SDG) 7 released a joint report, “Tracking SDG 7: The Energy Progress Report,” which examines the progress made toward the achievement of SDG 7, “ensure access to affordable, reliable, sustainable and modern energy for all” by 2030. While progress has been made toward increasing electricity access globally—441 million more people have electricity in 2019 compared to 2010—the report highlights how the world is not on track to achieve any of the targets under SDG 7. According to the authors, the trajectory has been further diverted due to the COVID-19 pandemic that places additional burden on supply chains and consumer’s income, and is set to increase the deficit of electricity access in 2020. Moreover, write the authors, the pandemic highlighted the importance of access to reliable electricity in facilitating the delivery of vaccination doses that rely on ultracold storage and in the general success of public health programs.

The key targets of SDG 7 include ensuring universal access to electricity and clean cooking solutions, increasing the share of renewable energy, improving energy efficiency, and, finally, increasing international collaboration to support clean and renewable energy efforts.
According to the report, the overall number of people without electricity access has steadily dropped worldwide, largely driven by the shrinking deficits in Central and Southern Asian countries. Notably, as seen in Figure 1, the 20 countries that comprise the smallest share of population with access to electricity in 2019 are all located in sub-Saharan Africa. At 7 percent, South Sudan had the lowest access to electricity in 2019, and countries like Chad, Burundi, and Malawi had slightly greater access. Figure 1 also shows improvements in access over 2010-2019 within this group of 20 countries. Uganda has the greatest access to electricity at 41 percent and experienced the greatest improvement in electrification, with an average annual growth of more than 3 percent. While all 20 countries are far below the world average of 90 percent for electricity access, half of them had much greater overall annual growth than the world average.
Figure 1. Electricity access in the 20 least-electrified countries, 2010–2019

Source: “Tracking SDG 7: The Energy Progress Report,” 2021.
Overall, sub-Saharan Africa accounts for 75 percent of the world’s population without access to electricity, and, as seen in Figure 2, the region’s access deficit has increased from 556 million people in 2010 to 570 million people in 2019. Importantly, though, while the number of people without access to electricity has overall increased within sub-Saharan Africa, from 33 percent in 2010 to 46 percent in 2019, the share has actually dropped due to rapid population growth. Such a trend indicates that electrification is lagging behind population growth in many places, particularly in countries like the Democratic Republic of the Congo, Nigeria, and Malawi. However, in countries like Kenya and Mali, advances in electrification outpaced their annual growth in population.
Figure 2. Regional access deficits (in millions of people without access) for 2010, 2017, and 2019

Source: “Tracking SDG 7: The Energy Progress Report,” 2021.
The authors highlight the importance that policy and regulatory framework has in enabling such large improvements in electrification in countries like Liberia and Guinea-Bissau, and even in countries like Cameroon that have faced conflict and violence within the time period. The authors argue that support for electrification is an imperative component of recovery packages and should particularly focus on mini-grid and off-grid electrical sources that play a key role in achieving universal access—even in rural, conflict-prone areas of Africa. Such developments depend mostly on startups and small-to-medium-sized businesses that have suffered under pandemic-related lockdown provisions and disruptions in their supply chains.

What can the G-7 learn from China’s transition to climate-smart growth?

As the leaders of the G-7 gathered for their summit in the U.K., the elephant was not in the room: China and its transition to a climate-smart growth. Over the last decade, China’s CO2 emissions rose by 25 percent to 14.1 billion tons and on a per capita basis increased to 10.1 billion tons a year, just below the OECD average.

While China’s emissions are very high, the country has also made notable progress in industrial restructuring, energy use efficiency, renewables in its energy mix, greenfield industries, and pilots for a carbon market. President Xi Jinping has said that China will achieve carbon emissions peak ahead of its 2030 target and would aim for net-zero emissions by 2060. More importantly, he also said that it is for China’s “own need to secure sustainable development.”
Since 2005, manufacturing and heavy industries have lowered their share of the GDP from 47 percent in 2005 to 41 percent in 2015, while services increased from 41 percent to 50 percent. This industrial transformation led to improvements in energy use efficiency. Coal consumption decreased to produce thermal power, cement, and steel (Figure 1).
Figure 1. Energy efficiency improvements in coal thermal plant, cement, and steel

Source: The People’s Republic of China Third National Communication on Climate Change (2019).
Energy consumption per unit of transport workload also decreased from 2005 to 2015. For instance, it dropped by 28 percent in railways as China built more energy efficient high-speed railways, 20 percent in waterways, 16 percent in highways, 14 percent for road transport, and 14 percent in aviation. Today, China is the world leader in electric vehicles. China is already ahead of most G-7 countries in transport energy efficiency.
China’s energy consumption mix has also been changing (Figure 2). Coal and oil are still significant but the share of nonfossil energy in primary energy consumption has increased in the last decade.
Figure 2. Growth of renewables in China’s energy mix

China has introduced a raft of market and nonmarket policy instruments—phasing out of inefficient and energy-intensive industries, energy targets in renewables and electric vehicles, tiered electricity pricing, abolition of consumption tax on low-emission vehicles, and introduction of preferential taxes on clean production and circular economy green bonds. China also mandated a reduction in energy-use targets in state-owned heavy industries, buildings, transportation, agriculture, commercial enterprises and households, and public institutions. Today, 100 percent of new buildings and towns in China are covered by energy conservation standards.
China has also been investing heavily in advanced semiconductors, robots, additive manufacturing, intelligent systems, new-generation aviation equipment, integrated service system for space technologies, intelligent transportation, precision medicine, efficient energy storage and distributed energy system, intelligent materials, circular economy, virtual reality, and interactive film and television. China also has plans to develop aerospace and marine technology, information network, life sciences and nuclear technology. In 2019, these new technologies accounted for about 19 percent of China’s GDP.