WASHINGTON — Democratic senators made clear their hopes of blocking a rule that makes it easier for national banks to sell loans to third parties, but invalidating the measure in the tightly divided Senate could be an uphill battle.
At issue is the ability of banks to partner with nonbanks in loan transactions and still enjoy interest-rate flexibility. Under the Office of the Comptroller's rule finalized in October, a national bank is considered to the "true lender" if it is named as such in a loan agreement or it funds the loan.
Banks say the rule is necessary to provide legal clarity when they engage in loan sales across state lines. The "true lender" rule followed a previous measure from the OCC saying that when a national bank makes a loan in compliance with applicable laws at the time, it will be compliant when sold anywhere else.
But consumer advocates and many Democratic lawmakers say the rules enable nonbanks to engage in "rent-a-bank" schemes to evade state usury laws and overcharge customers.
"As we've heard, this new, so-called 'true lender' rule really just opens up the floodgates to rent-a-banks and predatory lending," said Sen. Chris Van Hollen, D-Md., at a Senate Banking Committee hearing on Wednesday.
Van Hollen introduced a resolution last month — accompanied by one in the House — that would nullify the true lender rule under the Congressional Review Act. The law allows Congress to overturn regulations by simple majority, with the president's backing, if lawmakers act within 60 legislative days of the rule being published.
"I do hope that Congress will muster the votes to overturn it," Van Hollen said.
But whether Democrats have the votes is unclear. Republicans largely oppose the measure and, in general, the Democrats' majority in the Senate relies on a tie-breaking vote from Vice President Kamala Harris. That means that if just one member of the Democratic caucus votes against the resolution, it will be harder to pass it.
Still, Senate Banking Committee Chairman Sherrod Brown, D-Ohio, was reported to have expressed confidence in the resolution in comments to reporters on Wednesday. Politico reported that he indicated there may be some Republican support. "I am almost certain we're going to do it," Brown said, according to the news outlet. "We've got to count votes. We are awfully close to 50, or maybe above 50 because there is some Republican interest."
However, others in Congress have generally supported the OCC’s approach to the true lender rule, framing the issue as a matter of consumer choice and saying the rule allows for robust market competition.
“Contrary to some claims, the rule is not intended to facilitate rent-a-charter arrangements where banks don't comply with the law,” said Sen. Pat Toomey, ranking member on the Senate Banking Committee, during the hearing.
Among the witnesses testifying at the hearing was former acting Comptroller of the Currency Brian Brooks. He has argued that the OCC’s rule would better enable the agency’s bank examiners to supervise nonbank activity and clamp down on predatory loans.
The rule “provides a bright line as to when OCC examination and enforcement authority applies to ensure compliance with the very consumer protection and other legal requirements being discussed today associated with these kinds of loans,” Brooks said.
But Democrats and consumer advocates testifying at the hearing said the ability of financial institutions to use the true lender rule to evade state usury laws was obvious.
“This is not a close call, or even a complicated issue,” said Lisa Stifler, director of state policy at the Center for Responsible Lending.
Senate Banking Committee Chairman Sherrod Brown, D-Ohio, equated supporting the rule with supporting high-cost payday lenders.
"Like so much of what we do, this comes back to one question: Whose side are you on?" Brown said. "You can stand on the side of online payday lenders that brag about their creativity in avoiding the law, … or we can stand up for families and small businesses and state attorneys general and state legislators who have said enough, and are trying to protect themselves and their states from predatory lending schemes."
Although being named the true lender requires a national bank to ensure a credit product complies with consumer protection laws, it can then partner with a nonbank lender that in turn can avoid a state's interest rate cap.
“The OCC’s rushed and ill-conceived rule is bad for consumers and small businesses, is bad for states' rights, overturns centuries of case law, and is antithetical to the goal of an inclusive economic recovery,” Stifler said.
The OCC has tried to dissuade lawmakers from throwing out the rule. Current acting Comptroller Blake Paulson
But in the hearing, others argued the risks to consumers were too great to allow the rule to stand. Josh Stein, attorney general for North Carolina, said the rule would make it substantially harder for state regulators to crack down on predatory lenders.
“This rule, if not reversed, provides a get-out-of-jail-free card to predatory lenders who violate state laws limiting interest rates and fees on consumer loans,” Stein said in prepared testimony.
Toomey argued the effect of a successful repeal of the “true lender” rule could have the unintended effect of limiting access to credit for vulnerable communities.
“I think the more likely effect is that these loans simply won't get made,” Toomey said. “That's why price controls are not the answer. They'll exclude people from the banking system, restrict the credit supply and make it harder for low-income consumers to access credit that they need.”
But consumer advocates pushed back on that argument, saying predatory loans are worse than no credit at all for vulnerable consumers.
“Earlier, persons were talking about taking away choices from consumers,” said Reverend Dr. Frederick D. Haynes, III, senior pastor of Friendship-West Baptist Church in Dallas. “And yet, when the options are predatory, you set them up to make choices that will have consequences that, again, will do damage to the family, and further damage to a community that is already underserved.”
