On June 30, 2021, President Biden signed a Congressional Review Act (CRA) resolution rescinding the OCC True Lender Rule, a bright-line rule issued in October 2020 to simplify the standards governing when a traditional bank in a partnership with a non-bank is the “true lender.” The rule provided that a bank is the true lender if, as of the date of origination, it (1) is named as the lender in the loan agreement or (2) funds the loan.
The OCC’s rule was intended to address what the agency viewed as “uncertainty about how to determine which entity [in a bank partnership] is making the loans and, therefore, the laws that apply to these loans.” This uncertainty stemmed in part from disparate judicial rules about when a non-bank partner is the true lender. Courts and regulatory agencies have fashioned at least two approaches to the true lender question, each of which is multi-factored and provides little certainty about how to structure bank partnerships. In the OCC’s view, its True Lender Rule “provid[ed] the legal certainty necessary for banks to partner confidently with other market participants and meet the credit needs of their customers.”
Congressional Democrats thought otherwise. In late March 2021, Senators Sherrod Brown (D-Ohio) and Chris Van Hollen (D-Md.) introduced a CRA resolution to repeal the OCC True Lender Rule, citing concerns that the rule would encourage predatory lending and undermine consumer protections passed at the state level. The Senate passed this resolution on May 11, 2021 by a 52-47 vote. The House’s joint resolution, introduced in late March by Congressman Jesús G. “Chuy” García (D-Ill.), passed by a 218 to 208 vote on June 24, 2021. Democrats voted unanimously to overturn the OCC True Lender Rule. Just one Republican—Rep. Glenn Grothman of Wisconsin—joined their ranks.
Under the CRA, Congress may repeal any administrative agency action by a simple joint resolution, together with the President’s signature. President Biden’s approval of the congressional repeal of the OCC True Lender Rule means that the OCC may not “reissue[ a rule] in substantially the same form . . . unless the reissued or new rule is specifically authorized by a law enacted after the date of the joint resolution disapproving the original rule.”
While the congressional repeal eliminates the OCC True Lender Rule, it does not replace that rule with an approach of its own. The effect of the repeal, then, is to revert to the patchwork of judicial decisions that predated the OCC’s bright-line standard.
To be clear, the CRA only addressed the OCC True Lender Rule; it did not address the “valid-when-made” rules promulgated by the OCC and the FDIC earlier in 2020. Under these rules, loans made by financial institutions are subject to the interest rules applicable to those financial institutions, even after the loans are subsequently sold to third parties that could not themselves have made loans with those interest rate rules. The OCC and FDIC rules assume that the financial institutions are in fact the true lenders with the ability to impose the interest rates applicable to the loans, so the sole question is whether the interest rates can continue to apply to the loans after they are sold to third parties. The rules were intended to address the uncertainty created by the Second Circuit Court of Appeals in its “Madden” decision. The agencies concluded that the ability to impose interest rates under federal law includes the ability to sell or assign loans with those interest rates. These “valid-when-made” rules are essential for the liquidity of financial institutions and provide flexibility to the marketplace through securitization. Thus, while the CRA struck down the OCC True Lender Rule, the agencies’ “valid-when-made” rules remain in place.