Senate votes to repeal OCC ‘true lender’ rule

The Senate on Tuesday passed a resolution to repeal a rule governing partnerships between banks and third-party lenders that allow consumers to take loans with interest rates above their states’ maximum.

Senators voted 52-47 to pass a Congressional Review Act (CRA) resolution to revoke the Office of the Comptroller of the Currency’s (OCC) “true lender” rule and forbid the agency from issuing similar regulations, with 49 Democrats and GOP Sens. Cynthia Lummis (Wyo.) Susan Collins (Maine) and Marco Rubio (Fla.) voting in favor of repeal.

All 47 other Republican senators voted against repeal.

The resolution now heads to the Democratic-controlled House, which is expected to pass the measure for President Biden’s signature. The White House said Tuesday that it supports the passage of the repeal resolution, arguing that the OCC’s rule “undermines state consumer protection laws and would allow the proliferation of predatory lending.”

The OCC in October issued a rule intended to specify who is the true lender of a loan issued to a customer through a partnership between a nationally chartered bank and a third party, typically a non-bank lender. 

Federal district courts have ruled disparately on whether loans held by non-bank lenders are subject to state interest laws if they were initially issued by a bank, which can follow the interest rate limits of their home jurisdiction even when lending across state lines. That can allow a non-bank lender to loan at a higher interest rate than permitted under their state’s laws by teaming up with a bank headquartered in a state with a higher interest rate cap. 

The OCC rule specifies that the true lender of the loan is the party that is either listed as the true lender or funds the loan, arguing that it creates a clear, uniform standard that will still hold banks accountable to federal laws it enforces.

But Democrats — along with a coalition of consumer protection and faith groups — have fiercely opposed the rule, claiming it leaves customers vulnerable to predatory “rent-a-bank” schemes.

“States are taking measures to protect their constituents their consumers against these end-runs around their laws designed to prohibit these predatory practices. But last October, in the middle of the pandemic, when many working families were plunged into economic uncertainty and turmoil, the Trump administration gave these rent-a-bank schemes a free pass to exploit these loopholes,” said Sen. Chris Van Hollen (D-Md.), sponsor of the resolution to repeal the rule.

The OCC clamped down during the 2000s on rent-a-bank schemes, in which a lender temporarily partners with a bank to evade interest rate caps and then severs the partnership after taking ownership of the loan. Critics of the true lender rule say it will allow such schemes to flourish, particularly as nonbank online lenders make up a larger portion of the financial system.

A coalition of Democratic state attorneys general also sued the OCC in January, arguing the rule violated federal consumer protection laws and the OCC’s authority.

Most Republicans countered that the Democratic criticism is off base and that the rule actually bolsters consumer protections by bringing more lending partnerships under federal supervision.

“Banks must assess a borrower’s ability to repay before making a loan. So if banks systematically approve loans via fintech partnerships to consumers who can’t repay the debt, they’ll face consequences from their regulator. That’s far more protection than what currently exists for consumers,” said Sen. Pat Toomey (R-Pa.), ranking member on the Senate Banking Committee.

But Lummis shared concerns voiced by Democrats about the rule overstepping the OCC’s jurisdiction and undermining state consumer protection laws.

“This is a basic tenet of states maintaining sovereignty within their own borders, limited only by the US Constitution and federal law,” said Lummis, arguing that Congress should write a national standard that establishes parity among national and state banks to account for different limits on interest rates.

“For innovation to be truly lasting, it has to be built on a solid foundation and not pick winners and losers between national banks and state banks,” she said.