Senate Democrats take aim at ‘true lender’ interest rate rule

Senate Democrats are ramping up pressure on a federal bank regulator to scrap a Trump-era rule they say allows lenders to evade state interest rate limits and bilk vulnerable consumers.

In a Wednesday hearing, Democrats on the Senate Banking Committee said it was long past time for the Office of Comptroller of the Currency (OCC) to revoke its “true lender” rule.

The OCC in October finalized a rule meant to clarify who is the true lender of a loan issued to a customer through a partnership between a nationally chartered bank and a third party, typically a non-bank lender. A coalition of Democratic state attorneys general sued the OCC in January, arguing the rule violated federal consumer protection laws and the OCC’s authority.

“You can stand on the side of online payday lenders that brag about their creativity in avoiding the law and finding new ways to prey on workers and their families,” said Sen. Sherrod Brown (D-Ohio), chairman of the Senate Banking Committee, “or we can stand up for families and small businesses, and the state attorneys general and state legislatures who have said ‘enough.’”

The rule was issued by former acting Comptroller of the Currency Brian Brooks, a Trump appointee who resigned shortly before President Biden took office. But Biden has not yet nominated a full-time comptroller, allowing the rule to linger while acting Comptroller Blake Paulson, a career OCC employee, oversees the agency.

With no Biden appointee likely to take over the OCC soon, Democrats are considering trying to repeal the true lender rule through a Congressional Review Act (CRA) resolution. The law allows lawmakers to repeal regulations issued within a certain time frame and ban the agency from issuing a similar rule by passing a measure with simple majorities in each chamber.

Republicans, however, made clear that there would be little if any GOP support for repealing the true lender rule. They argued Wednesday that the OCC’s measure would give banks and lenders clear legal guidelines that would help expand access to credit and warned Democrats against limiting those options.

“There’s no question that we need to make everybody aware of their lowest-cost option for financing. Count me in for doing that,” said Sen. Thom Tillis (R-N.C.). “By removing this [rule] for the dads of today trying to get that short-term loan to put food on the table for six kids? Count me out of that.”

The true lender is meant to set national guidelines for partnerships between banks and third-parties that are subject to different state interest rate limits. Under the OCC rule, the true lender of the loan is the party that is either listed as the true lender or funds the loan.

Such partnerships can allow a financial company to offer a customer a loan with a higher interest rate than permitted under their state’s laws by teaming up with a federally chartered bank headquartered in a state with a higher interest rate cap. 

“I don’t look at interest as a bad thing if I’m somebody who has dings on my credit and I need a two-year personal loan to replace my roof or do one of the many things that people use these loans for,” Brooks told lawmakers Wednesday.

“I don’t think it’s up to me to say that’s a bad thing.”

Democrats and a coalition of consumer advocacy and faith groups have countered that the true lender rule will fuel the rise of “rent-a-bank” schemes, where a lender only partners with a bank to issue a loan to evade interest rate caps and then severs the partnership after taking ownership of the loan. The OCC cracked down on rent-a-bank schemes during the 2000s, but critics of the true lender rule say it will create more opportunities for them to thrive in a quickly expanding online lending landscape.

“While some of today’s schemes might be dressed up a little bit fancier with the fintech aura than the older schemes, they still have the same rent-a-bank evasion,” said Lisa Stifler, director of state policy at the Center for Responsible Lending.

“The loans we’re seeing are still extremely high cost and extremely predatory.”

Democrats have pushed for years to snuff out most high-cost, short-interest loans. The Consumer Financial Protection Bureau (CFPB) in 2017 proposed a rule that would effectively ban most “payday” loans, but the measure was gutted when a Trump appointee took over the bureau after the resignation of former CFPB Director Richard Cordray (D).

Democratic lawmakers have also called for setting a federal interest rate cap at 36 percent, but those measures are unlikely to make it through a 50-50 Senate. And while some Republicans have backed stronger lending protections, the vast majority say such limits are “patronizing” and inappropriate.

“The idea that we should forbid people from having access to loans because they can’t be trusted to make a good decision for themselves, does that strike you as a little bit patronizing and condescending?” asked Sen. Pat Toomey (Pa.), ranking Republican on the Senate Banking Committee.

Updated at 2:51 p.m.