Senate Votes to Halt True Lender Rule

The US Senate has voted to nullify the rule issued by the Office of the Comptroller of the Currency (OCC) entitled the National Banks and Federal Savings Associations as Lenders and published on October 30, 2020. The vote in the Senate was largely along party lines with Republican Senators Collins and Rubio crossing over to support the Democrat-sponsored resolution.

This resolution impacts the “True Lender” rule that is of concern for some Fintech lenders which may originate loans in partnership with banks.

In brief, as explained by JD Supra, a nationally chartered bank is subject only to the usury limits of the bank’s home state when issuing loans. Each state sets these lending limits independently. Federal law allows banks to apply the interest rates set in the bank’s home state to borrowers in other states. When banks have made loans in partnership with Fintechs, some have argued that the bank is not the true lender, and federal preemption should not apply.

The OCC had attempted to clarify a dicey situation pertaining to lending relationships between banks and third parties, such as Fintechs, that may facilitate access to affordable credit and thus benefit consumers. The uncertainty about the legal framework that applies to loans made as part of these relationships was fogged by the fact that each state has different lending rules. The OCC had said this uncertainty may discourage banks and third parties from entering into relationships, limit competition, and chill Fintech innovation that results from these partnerships, all of which may restrict access to affordable credit.

When the OCC proposed the True Lender clarification, Congressman Patrick McHenry, the Ranking Member on the House Financial Services Committee, issued a  statement in support of the OCC’s move calling it an “important step toward providing clarity to banks and non-banks on the ‘true lender’ doctrine.” McHenry said the OCCs decision would “foster greater innovation in financial services—ultimately leading to greater financial inclusion.”

Now the joint resolution moves onto the House where it is expected to pass.

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