The True Lender Rule: One Step Closer to Repeal

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The Office of the Comptroller of the Currency’s (the OCC) True Lender Rule is all but repealed.  On May 11, 2021, the U.S. Senate voted to approve a joint resolution to repeal the True Lender Rule under the Congressional Review Act (the CRA).  The House is expected to pass the measure and the president has expressed support for the resolution.

The eventual repeal of the True Lender Rule will likely affect consumer lending.  In today’s consumer lending arena, a bank may not be the funder of the loan.  It is not uncommon that the loan agreement names a national bank as the lender, with a non-bank entity as the funder.  The question then becomes which entity is the “true lender.”  Under the True Lender Rule, the national bank is the lender because the loan agreement identifies it as such.  The “true lender” designation is significant.  If the “true lender” is a national bank, then state usury laws generally do not apply to the loan because the National Bank Act of 1863 preempts state law.  On the other hand, if the “true lender” is a non-bank entity, then state usury laws would apply to the loan.  Without clear guidance on this issue, non-bank entities may become reluctant to originate loans, which would likely affect financial products and services offered to consumers.

To further the uncertainty, the next comptroller of the currency will not have a chance to modify the True Lender Rule if it is repealed.  Congress moved to repeal under the CRA, which prohibits the OCC from promulgating a replacement rule that is “substantially similar” to the one repealed.  It is unclear how the OCC will handle this issue going forward.  We will continue to monitor this issue for further developments.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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