Ballard Spahr LLP

As discussed in our earlier blog, the Senate Banking, Housing and Urban Affairs Committee held a hearing on April 28, 2021 entitled “The Reemergence of Rent-a-Bank?”.

The hearing focused primarily on the final “True Lender” rule issued by the OCC on October 27, 2020, which was effective December 29, 2020. The True Lender rule clarifies when, under existing law, a national bank is the “true lender” that makes a loan in the context of an arrangement between the bank and a non-bank entity that facilitates or services the loan. Since the non-bank entity frequently is a fintech, these arrangements often are referred to as bank-fintech partnerships or marketplace lending arrangements. Democrats have launched an effort to invalidate the True Lender rule by means of Congressional action under the Congressional Review Act (CRA). Separately, eight attorneys general representing seven states and the District of Columbia  have filed an action in federal district court in the Southern District of New York seeking to set aside the rule.

Predictably, at the hearing, True Lender rule detractors (the Democratic committee members and their witnesses) called upon Congress to overturn the True Lender rule, using the majority of their speaking time to claim the True Lender rule would enable (and to generally decry the evils of) unfair rent-a-bank schemes, as well as predatory lending, payday lending, usury, and debt traps. These speakers consistently conflated payday lending and bank-fintech partnership lending, and ignored correction of this mis-characterization by other witnesses.

True Lender rule proponents (the Republican committee members and their witnesses) explained the True Lender rule and its benefits to consumers, the banking system, and the economy as a whole. They pointed out that states’ establishment and enforcement of lower rate caps (which True Lender rule opponents believe would accelerate if the True Lender rule were to be invalidated) will not result in the availability of lower cost credit; rather, this is likely to eliminate availability of credit to those who need it most.

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

In his introduction, Committee Chairman Sherrod Brown (D-OH) expressed concerns that the True Lender rule would give a “free pass” to predatory payday lenders and so-called “rent-a-bank schemes”.

Ranking Member Patrick J. Toomey (R-PA) explained this is not the case: Under the True Lender rule, the OCC “holds a national bank responsible for a loan when, at the time the loan is originated, [the national bank] is named in the loan agreement or it funds the loan.” These loans are subject to OCC supervision to ensure the national bank complies with fair lending requirements and all other federal consumer protection laws. The rule disallows “rent-a-bank schemes” where the bank allows its name to be used on loan documents but disclaims any compliance responsibility for loans, as pointed out in a recent letter to the Committee from Blake Paulson, Acting Comptroller of the Currency. Senator Toomey explained the importance of the True Lender rule in facilitating credit availability on reasonable terms, in particular to higher-risk, marginalized consumers.

North Carolina Attorney General Josh Stein worried that the True Lender rule provides a get-out-of-jail-free card to predatory lenders, and claimed the rule exceeds the OCC’s authority – an argument addressed and refuted in detail by the OCC in the Supplementary Information accompanying the rule when published.

Lisa F. Stifler, Director of State Policy at the Center for Responsible Lending, a non-profit affiliated with a network of credit unions, voiced similar fears, including  that the True Lender rule would support predatory lending and payday loans at excessively high rates to small businesses as well as consumers.

Reverend Dr. Frederick D. Haynes, III cited opposition to payday lending and predatory lending by the faith-based groups he represents, mentioned concerns that the True Lender rule would “enable predatory lenders to ignore state interest rate caps by paying a bank willing to masquerade as the ‘true lender’ ”, and called on Congress to pass a 36% rate cap in addition to supporting a resolution to overturn the True Lender rule.

Brian Brooks, former Comptroller of the Currency, explained how the True Lender rule (issued during his tenure as Comptroller) operates in conjunction with the OCC’s Valid-When-Made rule and national bank rate exportation powers under the National Bank Act; the vital role of the True Lender rule in enabling expansion of credit availability to lower-income consumers on reasonable terms, with service improvements, tools and educational features enabled by fintechs; and the rule’s importance to bank balance sheet management and the safety and soundness of the banking system.  He pointed out that contrary to the claims of the rule’s opponents, the rule negates “rent-a-charter schemes” because it makes clear that the bank, as true lender, retains all compliance obligations with respect to the loans and “can’t walk away” from this responsibility:

But another purpose of the True Lender Rule was to address allegations about “rent-a-charter” schemes. While “rent-a-charter” is not a legal or technical concept, OCC staff took the concept to refer to situations in which a nonbank paid a fee to a bank for the sole purpose of evading legal requirements, without the bank actually being involved in loan underwriting, risk management, or legal compliance. In short, the OCC took “rent-a-charter” to mean an arrangement in which the nonbank was seeking to ensure that no one was actually responsible for consumer protection or other compliance obligations. That is precisely why the OCC, in issuing the True Lender Rule, expressly stated that it would “hold [] banks accountable for all loans they make, including those made in the context of marketplace lending partnerships or other loan sale arrangements.” Specifically, the OCC emphasized its “expectation that all banks [will] establish and maintain prudent credit underwriting practices and comply with applicable law, even when they partner with third parties.” If not, “the OCC will not hesitate to use its enforcement authority consistent with its longstanding policy and practice.” This is in contrast with historical practice in which banks sought to minimize their role in loan origination at the same time their marketing partners sought to disclaim responsibility as the true lender. Under the True Lender Rule, the days of each party pointing the finger at the other are over; borrowers and regulators now know who is responsible if the bank either is named on the note or funds the loan on the date of origination.

Mr. Brooks corrected the impression conveyed by other witnesses that the True Lender rule somehow would support abusive payday lending, explaining that national banks are not allowed to make the types of loans generally described as payday loans (and therefore could not make them in the context of a bank – fintech partnership), and noting that payday lenders are state-licensed entities, therefore the licensing state has the responsibility to supervise them and the authority to revoke their licenses.

Dr. Charles W. Calomiris referred committee members to his written testimony, which summarizes research demonstrating that lower income borrowers suffer disproportionately from unreasonable usury rate caps. He also refuted earlier speakers’ claims that bank-fintech partnerships promote payday loans: “The new fintechs should not be confused with payday lenders: they are the competition to payday lenders.” He cited new products offered by innovative fintechs that provide value and lead to improved financial inclusion for unbanked or underbanked consumers, detailed in an appendix provided with his written testimony.

Committee member questions addressed to the witnesses, and the responses, generally followed the same themes.

In response to a question from Senator Brown, AG Stein stated his belief that the True Lender rule will make it challenging for states to pursue predatory rent-a-bank schemes, and asserted that the state of North Carolina has made a conscious choice in its legislative approach to intentionally cause a shortage of high-cost loans, thereby making it more difficult or impossible for low- to moderate-income, higher-risk consumers to obtain loans. Senator Toomey then asked Mr. Brooks whether the choice described by AG Stein was “patronizing”; Mr. Brooks responded that consumers should be allowed to make their own decisions.

Senator Thom Tillis (R-NC), in questions to Mr. Brooks, emphasized the importance of credit availability, which would be supported by the True Lender rule. Mr. Brooks noted the True Lender rule will further the OCC’s goal of encouraging national banks to engage in small dollar personal lending, 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 doubt as to whether the OCC’s supervision of national banks is sufficiently zealous to protect consumers.

The Committee members’ comments and questions made it clear that their respective minds already are made up as to how they would vote on a CRA resolution to invalidate the True Lender rule, regardless of the data and information provided by the witnesses. At this writing, most observers predict that the True Lender rule will not be overturned, either because Congressional leaders do not think it merits floor time and think a Biden-appointed Comptroller will take care of their concerns, or, if put to a vote, because moderate Democrats understand the economic issues and will not support invalidating the rule.

The deadline for a CRA vote is estimated to be in mid- to late May.

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