President Biden Signs Resolution

On June 30, 2021, US President Joe Biden signed into law a joint resolution by the US Senate and Congress to repeal the final “true lender” rule issued by the Office of the Comptroller of Currency (OCC) in 2020. The true lender rule was made under former President Donald Trump’s administration.

The OCC first proposed the true lender rule in July 2020 and issued the final rule in October 2020. The final rule adopted the two-pronged test outlined in the early proposal to determine who was the true lender in a financing transaction involving a national bank or federal savings association.

The final rule clarified that a national bank or a federal savings association was the true lender if on the origination date. It was identified in the loan agreement as to the lender or funded the loan. The OCC went further to add that if on the origination date one bank was named lender in the loan agreement but another one funded the loan, then the bank that was named lender would be the true lender.

The OCC issued this final rule to clarify financing transactions where loans were made by banks with the assistance of fintech or non-bank entities, as well as where those entities bought loans from banks, assuming full or partial ownership of their accruing economic interests. In such cases, the third parties often relied on the originating banks’ federal preemption rights, especially when loan interest rates exceeded relevant state usury regulations.

The OCC’s final rule clarified when a bank was the true lender, hence retaining all compliance obligations relating to loan origination. The OCC issued the final rule in October and scheduled it to take effect 60 days from publication in the Federal Register.

When the OCC proposed the rule in July 2020, it was immediately met with criticism from some consumer groups who complained that it did not do enough to curtail predatory lending and would foster it by promoting rent-a-bank schemes. Anticipating these criticisms when issuing the final rule, the OCC acknowledged the concerns of these consumer groups, affirmed its intolerance for such schemes in the federal banking system, and reminded critics of the robustness of its supervisory framework that effectively targeted such predatory lending. According to the OCC, this supervision achieved the same result as a more comprehensive true lender test while ensuring access to critical financing by consumers.

These assurances, however, were not enough to assuage the concerns of the incoming Democrat-led US Congress, which, led by Speaker Nancy Pelosi, supported a repeal of the rule because it promoted predatory lending. Relying on powers bestowed on them by the Congressional Review Act (CRA) to review and repeal rules made by federal agencies in the last 60 days of an outgoing administration, the US Senate and Congress passed a joint resolution on May 11 and June 24, respectively to repeal the rule. President Biden signed the joint resolution into law on June 30.

Following the revocation, the OCC’s final rule ceased to have an effect. Further, the OCC was barred from reissuing the same rule or issuing a similar one. Reacting to the repeal, the OCC issued a statement reaffirming its position against predatory lending. It then stated that it would consider making policies that protected consumers while promoting financial access and remaining consistent with the CRA in the future.

The final rule’s repeal marked a reversion to the previous era where the courts determined real lender issues based on state law and the facts of each case. Hence, the absence of a consistent national law could create uncertainty for investors and financiers, possibly hampering financial access.