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‘True Lender’ Rule Not Fully Dead Despite Congressional Repeal

June 28, 2021, 10:02 AM

Federal regulators have options if they want bring back another version of the “true lender” rule that was repealed by Congress through a process meant to discourage the return of a substantially similar proposal.

The Trump-era rule made banks the “true lender” on loans issued in partnership with fintechs, triggering consumer advocates’ fears that online lenders were “renting” national banks to evade states’ interest rate caps.

Supporters of the rule, issued in October, heavily opposed Congress’ June 24 move to repeal it through the Congressional Review Act. They feared the CRA’s restriction on agencies from bringing back a “substantially similar” replacement meant the death of true lender regulations.

But the meaning of “substantially similar” isn’t clear, and the law limits judicial review of replacement regulations. That gives the Office of the Comptroller of the Currency leeway to bring back a different version of the true lender rule, attorneys and advocates said. The OCC’s options for a remade proposal could include consumer protection measures and setting interest rate caps on bank-fintech loans that are friendlier to consumers.

“There has been considerable doubt cast on the conventional wisdom that the CRA ‘salts the earth’ for future regulations when previous versions have been repealed under the CRA,” said Amit Narang, the regulatory policy advocate at Public Citizen, a consumer advocacy organization.

“Although there is uncertainty, the OCC likely still has ample authority and discretion to issue another true lender rule in the future,” he said.

President Joe Biden is expected to sign S.J. Res. 15 into law in the coming days.

Expanded Definition

The OCC’s rule established that loans issued by fintechs in partnership with national banks are governed by the National Bank Act, a federal law that preempts state laws and regulations.

Since the National Bank Act was enacted during the Civil War, courts have interpreted the law to govern loans issued in partnership with national banks, overriding all state laws and regulations.

For the act to apply, banks were expected to underwrite the loans in conjunction with the third-party lender.

The true lender rule, finalized under former acting Comptroller Brian Brooks, went further by stating that banks would have true lender status either through traditional underwriting or simply by providing paperwork support.

Consumer advocates feared that the OCC rule could bring back rent-a-bank schemes that would allow high-cost lenders to issue loans that wouldn’t be subject to more restrictive state rules.

“The problem with this OCC true lender rule is that it announced that the bank should always be considered the true lender, no matter what role it had in the loan,” said Alex Horowitz, a senior officer at the Pew Charitable Trusts’ Consumer Finance Project.

Another rule may not be completely necessary, considering the way the National Bank Act has been interpreted for more than a century, he said.

“For the most part, it’s clear who the true lender is, who has the predominant role in the partnership,” Horowitz said.

But if banks want more clarity, the OCC could issue detailed guidance or examination bulletins for banks to follow, he said.

Colorado Model

There are options available for crafting a new true lender rule should the OCC take that route, said Karen Solomon, senior of counsel at Covington & Burling LLP and a former top OCC official.

“One would be to rewrite the rule, but in a way that is friendlier to consumer interests,” she said.

Soloman pointed to an August 2020 settlement with the state of Colorado under which fintechs Avant LLC and Marlette Funding LLC and their bank partners, WebBank Inc. and Cross River Bank, agreed to comply with the state’s 36% interest rate cap on all loans they issued in the state.

The online lenders also agreed to be licensed and supervised by Colorado’s financial regulator.

The OCC could “write a rule that has some of the protective features that Colorado and other states have put in place,” Solomon said.

To contact the reporter on this story: Evan Weinberger in New York at eweinberger@bloomberglaw.com

To contact the editors responsible for this story: Laura D. Francis at lfrancis@bloomberglaw.com; Roger Yu at ryu@bloomberglaw.com