A repeal of a rule that aimed to close a gap in the process of banks selling loans to third parties is a step closer toward its objective and the White House yesterday indicated that should the repeal make it to the desk of President Joe Biden, he will likely sign it into law. The Senate passed a bill yesterday by a vote of 52-47 to invoke the Congressional Review Act to repeal a rule known as the “True Lender” rule that was issued last year by the Office of the Comptroller of the Currency and sought to reduce the legal uncertainty that may have kept banks from partnering with third parties. Critics of the rule say it allows predatory lenders to skirt state usury laws.
The bill, which was introduced in March by Sen. Chris Van Hollen [D-Md.] and Sen. Sherrod Brown [D-Ohio], now heads to the House of Representatives for its consideration.
Under the OCC’s rule, a bank that makes the loan is the true lender, if, as of the day the loan is originated, it is named as the lender in the loan agreement or it funds the loan. The rule also specifies that if, as of the date of origination, one bank is named as the lender in the loan agreement for a loan and another bank funds that loan, the bank that is named as the lender in the loan agreement makes the loan. The rule supplemented another rule that the OCC and the Federal Deposit Insurance Corp. each implemented that confirms the “valid when made” doctrine, which states that the terms of a loan remain valid after the loan is sold to an entity by a national bank.
But consumer advocates and Democrats argued that the rule allows non-banks to make an end-run around state usury laws that limit the interest rate that can be charged on different types of loans.
“For years, under both Democratic and Republican administrations, federal regulators cracked down on abusive ‘rent-a-bank’ schemes in which payday lenders funnel their high-interest, predatory loans through national banks to evade state interest rate caps. The OCC’s rule completely reversed that policy, betraying hard-working American families and attacking states’ ability to protect their citizens from predatory loans. I’m heartened that my Senate colleagues have joined us in overturning this harmful rule and urge the House to follow suit,” said Sen. Brown, in a statement. “Today, we showed the people we serve that we’re on their side.”
Republicans, meanwhile, chastised the passage of the bill.
“Without the rule, the secondary market for these loans would be disrupted, which, again, disproportionately harms lower-income borrowers,” said Sen. Pat Toomey [R-Pa.], the ranking member of the Senate Banking Committee, during comments made opposing the bill. “How? When a bank sells a loan it frees up capital to make more loans. Banks can issue far fewer loans if they cannot reliably sell them into the secondary market. Fewer loans means more expensive credit and less willingness to provide the limited supply of credit to higher-risk borrowers.”
