Small Business Groups Applaud Plan to Repeal Rule that Protects Predatory Small Business Lenders

March 25, 2021

Main Street Alliance joined 325+ groups representing all 50 states and DC called for Congress to overturn a rule that helps high-cost lenders evade state interest rate limits

Main Street Alliance applauded the announcement that Senator Chris Van Hollen (D- MD), Senator Sherrod Brown (D-OH), and Congressman Jesus “Chuy” García (D-IL-4) will introduce Congressional Review Act (CRA) resolutions to eliminate a regulation enacted late last year that helps lenders charging 139% APR or more on small business loans evade state interest rate laws. The resolutions are expected to be introduced today in the Senate and tomorrow in the House of Representatives.

“Small businesses struggling with the ongoing COVID crisis are at risk to predatory rent-a-bank schemes who prey on their dire need for access to capital. We applaud Senator Van Hollen, Senator Brown and Representative Garcia for introducing resolutions to overturn the OCC’s horrible fake lender rule, which protects predatory small business lenders that are trying to evade state laws that protect small businesses,” said Main Street Alliance Government Affairs Director Didier Trinh. "We must protect our small businesses during the incredibly vulnerable time. Rent-a-bank schemes and predatory lenders should not have the protection of federal regulation."

Most states have usury laws that limit interest rates on some consumer loans, and some states also protect small businesses. But most banks are exempt from state interest rate limits. As a result, some high cost lenders have started laundering their loans through a bank in order to claim that it is a “bank loan” exempt from state interest rate caps. For example, New York has a 25% criminal usury cap. But World Business Lenders made a $90,000 loan to a struggling small business in New York at 138% APR, secured by the owner’s home, and then threatened to foreclose. Axos Bank was listed on the paperwork as the lender.

Testimony before Congress last year detailed that example and numerous other examples of similar predatory loans by World Business Lenders, resulting in threatened or actual foreclosures of the small business owner’s homes. When challenged in court for violating state interest rate limits, World Business Lenders has claimed that Axos Bank is the lender and is exempt from state interest rate laws.

Late last year, the Office of the Comptroller of the Currency (OCC), the federal bank regulator that regulates Axos Banks and other national banks and federal savings associations, enacted the “fake lender” rule that is the subject of the CRA resolutions. The fake lender rule protects “rent-a-bank” schemes whereby predatory lenders (the true lender) launder their loans through a few rogue banks (the fake lender), in order to claim that it is a “bank loan” exempt from state interest rate caps. The fake lender rule overrides 200 years worth of caselaw allowing courts to see through usury evasions to the truth, and replaces it with a pro-evasion rule that looks only at the fine print on the loan agreement. 

Earlier this week, Main Street Alliance joined a broad coalition of more than 325 small business, civil rights, community, consumer, faith, housing, labor, legal services, senior rights, student lending, and veterans organizations representing all 50 states and the District of Columbia calling on Congress to overturn the “fake lender” rule, which threatens to “unleash predatory lending in all fifty states.”

Congress can use the Congressional Review Act (CRA) to rescind recently finalized regulations, including the OCC’s “fake lender” rule, with just a majority vote in both chambers, limited debate, no filibuster, and the president’s signature. But a CRA resolution must be enacted within a limited time, currently estimated between May 10 and May 21.