There is a strong bipartisan tradition in the mountain state of ensuring that lenders cannot take advantage of borrowers by charging usurious rates. Just one example is the CashCall v Morrisey case, which was originally prosecuted by Attorney General Darrell McGraw and defended in the US Supreme Court by Attorney General Patrick Morrisey against non-government lender CashCall.
CashCall had charged hundreds of West Virgins 89% to 96% interest on loans between $ 1,075 and $ 5,000 in violation of West Virginia usury laws. On those loans, CashCall had required borrowers to pay more than three times the amount originally received. (For example, on a $ 2,600 loan for 42 months, the borrower had to repay $ 9,095.)
CashCall allegedly made these loans through a small South Dakota bank that “rented” their name so these loans could avoid West Virginia state laws that forbid usury. (South Dakota does not limit interest rates, and federal law allows banks to charge any interest rate permitted in their home state.) The West Virginia Supreme Court agreed with the court’s finding that the bank was not the real lender and that the loan was structured so that CashCall can hide behind the bank.
The court declined to examine just the name on the loan agreement or the “superficial appearance of CashCall’s business model.” Instead, the court found that these loans were actually made by CashCall to circumvent state law. CashCall was ordered to repay the illegal interest it charged West Virginia borrowers.
However, a rule passed at the end of 2020 by the Office of the Comptroller of the Currency or OCC would actually deter the courts from determining that the banks are just “fake lenders” in these cases. The rule allows predatory lenders to ignore state laws as long as a bank is “named as the lender in the loan agreement.” Nothing more is required.
The OCC rule overturns centuries of case law allowing the courts to see beyond the truth and actually protects these predatory lenders from states’ efforts to protect consumers. If the OCC rule persists, West Virginia will not be able to protect its citizens from predatory high-yield lenders like CashCall.
Interest caps are the simplest and most effective protection against predatory loans. People who tend to be involved in these high yielding loans are often desperate for help, including many of the working poor, elderly, veterans, and small business owners in the state. In most situations, however, the government-regulated lenders get cheaper and fairer loans.
As in West Virginia, 44 other states and Washington, DC cap interest rates on installment loans. The “fake lender” rule threatens state laws that are largely supported by voters on a bipartisan basis. In November 2020, 83% of Nebraska voters were in favor of a 36% interest rate cap on loans.
Large majorities in red and blue states have voted in favor of rate caps (i.e. Arizona, Colorado, Montana, Ohio, South Dakota). Indeed, under the leadership of both parties, West Virginia legislation has maintained strong protections against predatory lending in our state law. However, all efforts by states to protect borrowers from usurious credit such as CashCall’s interest rates are being undone by the OCC rule.
Congress is considering repealing the OCC “fake lender” rule in order to preserve the ability of states to apply interest rate caps. Hopefully the West Virginia senators and officials in Congress will side with the people of our state.
Margot Saunders of Hurricane is Senior Counsel to the National Consumer Law Center. She acted as an advisor to the West Virginia Attorney General in the prosecution of CashCall for usury and 50 other consumer protection cases across the country.