Supporters and Enemies of OCC Spar Real Lender Rule at Senate Rent-a-Bank Committee Hearing | Ballard Spahr LLP


As discussed in our previous blog, the Senate Committee on Banking, Housing and Urban Affairs held a hearing on April 28, 2021 entitled “The re-emergence of bank rent?”.

The hearing focused mainly on the final rule of the “real lender” issued by the OCC on October 27, 2020, which came into effect on December 29, 2020. The True Lender Rule specifies when, under applicable law, a national bank is the “true lender” making a loan in as part of an agreement between a bank and a non-bank entity that facilitates or provides the service of the loan. Since the non-bank entity is often a fintech, these arrangements are often referred to as bank-fintech partnerships or market loan agreements. Democrats have launched a effort to invalidate the True Lender Rule through Congressional Action under the Congressional Review Act (CRA). In addition, eight attorneys general representing seven states and the District of Columbia have filed an action in a federal district court for the Southern District of New York seeking to overturn the rule.

As might be expected, at the hearing, critics of the real lender rule (the Democratic committee members and their witnesses) called on Congress to overturn the real lender rule, using the majority of their time to claim the rule of the real lender would allow (and generally the misdeeds of) unfair bank hire plans, as well as predatory loans, payday loans, usury and debt traps. These speakers consistently confused payday loans and bank-fintech partnership loans, and ignored the correction of this mischaracterization by other witnesses.

Proponents of the real lender rule (the Republican committee members and their witnesses) explained the real lender rule and its benefits to consumers, the banking system, and the economy as a whole. They stressed that the establishment and enforcement by states of lower rate caps (which opponents of the True Lender rule say would speed up if the True Lender rule were invalidated) will not result in the availability of credit. cheaper; on the contrary, it will likely eliminate the availability of credit for those who need it most.

A video recording of the hearing, written versions of opening remarks by Committee Chair Sherrod Brown (D-OH) and Ranking Member Patrick J. Toomey (R-PA), as well as written testimony submitted by witnesses, are available on the Committee’s website.

In his introduction, committee chair Sherrod Brown (D-OH) expressed concern that the real lender rule would give predatory payday lenders and so-called “free pass” a “free pass”. bank rental systems ”.

Ranking member Patrick J. Toomey (R-PA) explained that this is not the case: Under the true lender rule, the OCC “holds a national bank accountable for a loan when, when the loan is issued, [the national bank] is named in the loan agreement or funds the loan. These loans are subject to oversight by the OCC to ensure that the National Bank complies with fair lending requirements and all other federal consumer protection laws. The rule prohibits “bank leasing systems” in which the bank allows the use of its name on loan documents, but disclaims any compliance responsibility for loans, as stated in a recent letter on the Committee of Blake Paulson, Interim Controller of the Currency. Senator Toomey explained the importance of the true lender rule in facilitating the availability of credit on reasonable terms, especially for marginalized, higher risk consumers.

North Carolina Attorney General Josh Stein was concerned that the real lender rule would provide predatory lenders with a jail release card, and claimed the rule exceeded the authority of the OCC – an argument addressed and refuted in detail by the BCC in the supplement. Information accompanying the rule when it is published.

Lisa F. Stifler, director of state policy at the Center for Responsible Lending, a nonprofit affiliated with a network of credit unions, expressed similar fears, including that the real lender rule would support predatory lending and excessively high rate payday loans for small businesses as well as consumers.

Reverend Dr Frederick D. Haynes III spoke of opposition to payday loans and predatory lending from the faith groups he represents, raised concerns that the real lender rule “would allow predatory lenders to ignore state interest rate caps by paying a bank willing to do so. masquerading as the “real lender”, ”and called on Congress to pass a 36% rate cap in addition to supporting a resolution to overturn the real lender rule.

Brian Brooks, former Comptroller of the Currency, explained how the True Lender Rule (issued during his tenure as Comptroller) works in conjunction with the Rule valid once made and export powers at the national bank rate under the National Bank Act; the vital role of the true lender rule in enabling the expansion of credit availability for low-income consumers on reasonable terms, with service enhancements, tools and educational features made possible by fintechs; and the importance of the rule for the management of the bank balance sheet and the safety and soundness of the banking system. He pointed out that contrary to claims by opponents of the rule, the rule overrides “charter leasing schemes” because it makes it clear that the bank, as a true lender, retains all compliance obligations with respect to loans. and “cannot walk away” from this responsibility:

But another purpose of the true lender rule was to respond to claims about “hire-charter” schemes. Although “charter hire” is not a legal or technical concept, OCC staff referred to situations in which a non-bank organization paid a fee to a bank for the sole purpose of evading money. to legal requirements, without the bank being really involved. in loan underwriting, risk management or legal compliance. In short, the OCC interpreted the term “hire a charter” as an arrangement in which the non-bank body sought to ensure that no one was actually responsible for consumer protection or other compliance obligations. This is precisely why the OCC, in publishing the True Lender Rule, expressly stated that it “would hold [] banks are responsible for all loans they make, including those made under market lending partnerships or other loan sales arrangements. “More specifically, the OCC underlined its” expectation that all banks [will] establish and maintain prudent credit underwriting practices and comply with applicable law, even when partnering with third parties. Otherwise, “the BCC will not hesitate to use its enforcement power in accordance with its long-standing policy and practice.” This contrasts with the historical practice in which banks sought to minimize their role in loan origination at the same time as their business partners sought to shirk responsibility as a true lender. By virtue of the true lender rule, the days of each party pointing fingers at the other are over; borrowers and regulators now know who is responsible if the bank is named on the note or finances the loan on the date of grant.

Mr Brooks corrected the impression given by other witnesses that the real lender rule somehow favors predatory payday lending, explaining that domestic banks are not allowed to grant types loans generally described as payday loans (and therefore cannot be granted in the context of a bank-fintech partnership), and noting that payday lenders are entities licensed by the state, the state that issuing licenses therefore has the responsibility to supervise them and the power to revoke their licenses.

Dr. Charles W. Calomiris referred committee members to his written testimony, which summarizes research showing that low-income borrowers disproportionately suffer from unreasonable usury rate caps. He also refuted claims by previous speakers that bank-fintech partnerships favor payday lending: “New fintechs should not be confused with payday lenders: they are the competition for payday lenders.” He cited new products offered by innovative fintechs that bring value and lead to better financial inclusion of unbanked or underbanked consumers, detailed in an appendix accompanying his written testimony.

Questions from committee members to witnesses and responses generally followed the same themes.

In response to a question from Senator Brown, AG Stein said he was convinced that the true lender rule will make it difficult for states to pursue predatory bank lease programs, and asserted that the state of North Carolina had made a conscious choice in its legislative approach to intentionally cause a shortage of high cost loans, making it more difficult if not impossible for low to moderate income and high risk consumers to obtain loans. Senator Toomey then asked Mr. Brooks if the choice described by AG Stein was “condescending”; Mr Brooks responded that consumers should be allowed to make their own decisions.

Senator Thom Tillis (R-NC), in his questions to Mr Brooks, stressed the importance of the availability of credit, which would be supported by the real lender rule. Mr Brooks noted that the true lender rule will contribute to the OCC’s goal of encouraging domestic banks to engage in low-value personal loans, which would benefit consumers because the loans would be made. by well supervised entities.

Senator Elizabeth Warren (D-MA), in questions to Mr Brooks, expressed doubts whether the BCC’s oversight of domestic banks is zealous enough to protect consumers.

Comments and questions from Committee members made it clear that their respective opinions are already taken as to how they would vote on a CRA resolution to strike down the True Lender Rule, regardless of the data and information. provided by witnesses. As of this writing, most observers are predicting that the True Lender Rule will not be overturned, either because Congressional leaders do not think it deserves the speaking time and believe that a monitor appointed by Biden will take care of their concerns, or, if put to a vote, because moderate Democrats understand the economic issues and will not support overturning the rule.

The deadline for an ARC vote is estimated to be between mid-May and the end of May.


About Christopher Easley

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