Biden Signs Law Overturning True Lender Rule

Cooley Alert
July 2, 2021

On June 30, 2021, President Joe Biden signed a joint resolution to revoke the Office of the Comptroller of the Currency’s (OCC) “true lender” rule (the “Rule”). Passed in October 2020, the Rule clarified that a national bank was the true lender of a loan if it was the named lender on the loan agreement or funded the loan. Under the Trump administration, the OCC said the Rule would provide regulatory clarity for banks, borrowers and other stakeholders to identify the lender in a transaction. However, many Democrats, including House Speaker Nancy Pelosi (D-Calif.), as well as consumer rights advocates, supported the repeal of the Rule, citing concerns about how the Rule might enable predatory lending and “rent-a-bank” partnerships between lenders and banks to lend at higher interest rates.

The joint resolution passed the Senate on May 11, 2021, on a vote of 52 to 47, with three Republican Senators voting in favor, and the House on June 24, 2021, on a vote of 218 to 208, with one Republican voting with 217 Democrats. Congress repealed the Rule pursuant to the Congressional Review Act (CRA), under which Congress can review agency rules and regulations, and repeal rules passed in the previous 60 legislative days through joint resolution. The repeal of the Rule fell under the “look back” period, which enables a new Congress to review rules issued in the final 60 days of the previous Congressional session.

Under the CRA, the OCC is now prohibited from reissuing the same rule or passing a new rule that is substantially similar to the repealed rule. Acting Comptroller of the Currency Michael J. Hsu issued a statement on June 24 after the House vote that “reaffirm[ed] the agency’s long-standing position that predatory lending has no place in the federal banking system.” Hsu said that going forward, the “OCC will consider policy options, consistent with the Congressional Review Act, that protect consumers while expanding financial inclusion.”

The repeal of the Rule adds more complexity for certain fintech and other nonbank lending companies in determining their state regulatory requirements, particularly with respect to state interest rate cap restrictions and other state licensing and consumer credit compliance measures. Determining the true lender status in any given transaction likely will depend on the specific facts of each partnership. In the context of state usury laws, this change will become especially relevant as interest rates rise, unless there is federal legislative action to create a federal usury limit. Note that the Rule did not apply to state-regulated banks that are regulated by the Federal Deposit Insurance Corporation.

Biden’s action renders moot a lawsuit filed in January 2021 by eight state attorneys general, which was led by New York Attorney General Letitia James, who had argued that the Rule “sanction[ed] high-cost lending schemes devised to evade state usury laws” and “invit[ed] predatory consumer-lending partnerships between banks and lightly regulated non-depository lenders.” With the Rule’s repeal, courts are likely to continue to scrutinize certain bank partnership models where a national bank originated the loans.

Cooley summer associate Katie Kaufman contributed to this alert.

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