Senator Chris Van Hollen (D-MD) introduced a Congressional Review Act (CRA) resolution of disapproval on March 26 that would invalidate the Office of the Comptroller of the Currency’s (OCC’s) true lender final rule. The resolution is co-sponsored by Senate Banking Committee Chair Sherrod Brown (D-OH) and Senators Jack Reed (D-RI), Elizabeth Warren (D-MA), Catherine Cortez-Masto (NV), Tina Smith (D-MN), and Dianne Feinstein (D-CA). Representative Chuy Garcia (D-IL), who serves on the House of Representatives Committee on Financial Services, participated in the introduction of the resolution, which appears to indicate support for the resolution by House Democrats.
The statutory deadline for Congress to act on the resolution of disapproval would, based on Congress’s current legislative schedule, fall in approximately mid-May. While the White House has not yet announced its position on the resolution, the support of senior leaders on the Senate Banking Committee suggests that President Joseph Biden may be likely to sign the resolution into law. If Congress does not pass the resolution by the statutory deadline, the new (and not yet announced) Comptroller of the Currency could still seek to repeal or modify the rule in the future through the administrative process.
CRA resolutions generally are subject to rules for expedited consideration in the Senate, which means that they require only a simple majority vote in the Senate to advance because CRA disapproval resolutions are specially-privileged joint resolutions not subject to filibuster or other normal blocking procedures in the Senate. However, unless at least one Republican senator joins the Democratic majority, a unanimous affirmative vote of the Democratic senators will be required (assuming that Vice-President Kamala Harris would be the tie-breaking vote in favor of the CRA). At this point other Democratic senators have not indicated how they would vote.
As we have previously reported, the OCC issued a final rule in October 2020 that determines when a national bank or federal savings association (bank) makes a loan and is the “true lender” in the context of a partnership between a bank and a third party, such as a marketplace lender. The final rule largely adopts a bright-line standard for determining when a bank makes a loan. Specifically, a bank makes a loan when, as of the date of origination, it is named as the lender in the loan agreement, or it funds the loan. This final rule went into effect on December 29, 2020.
Consequences of CRA Invalidation/Takeaways
While it remains to be seen how strong support for the disapproval resolution will be, the aggressive stance taken by the Democratic leadership of the Senate Banking Committee in their public statements—and the strategic prioritization of this proposed change over numerous other rules issued by the OCC, Consumer Financial Protection Bureau, and Federal Deposit Insurance Corporation—suggests a very real possibility that the resolution could pass.
Any rule invalidated under the CRA is treated as if the rule had never taken effect. Thus, a CRA invalidation of the true lender rule would revert the law governing when a bank is acting as the “true lender” to the various pre-rule, court-created standards, many of which were divergent and sometimes inconsistent. In some cases, courts concluded that the form of the transaction alone resolves this issue. Under this analysis, the lender is the entity named in the loan agreement. In other cases, courts applied fact-intensive balancing tests, in which they considered a multitude of factors, with no dispositive factor and no predictable, bright-line standard. Still other courts applied a “predominant economic interest” test in conducting this analysis but did not necessarily consider all of the same factors or give each factor the same weight.
In jurisdictions where courts have applied balancing tests—or where there is no case law—knowing which legal framework sets the parameters of usury, fees, and licensing as of the date of loan origination can be difficult. For example, federal law establishes the interest a bank may charge on any loan it makes and authorizes the bank to export that rate from the state in which it is located to borrowers in other states. While the OCC clarified last year that the permissibility of interest charged on a loan made by a bank is not affected by the subsequent sale, assignment, or other transfer of the loan (which we previously reported), the invalidation of the OCC’s true lender rule would mean that there is no uniform standard to determine if a loan is, in fact, made by a bank rather than its nonbank partner.
A successful CRA invalidation of the true lender rule could substantially impact the OCC’s authority to address the true lender issue in the future because the CRA prohibits an agency from reissuing any rule previously invalided under the CRA in “substantially the same form.” While the courts have yet to adjudicate the scope of the “substantially the same form” prohibition, the standard would, at the very least, prohibit the OCC from reissuing the true lender rule in the same form or with mere cosmetic changes.
The CRA provides a faster way to repeal a rule than requiring the agency to use Administrative Procedures Act (APA) notice-and-comment procedures. However, there are drawbacks – the “substantially the same form” standard limits the agency’s ability to replace the rule and could lead to legal challenges if a new true lender rule were to be issued with insufficiently substantial changes.
We will provide additional updates if there are further developments. In the meantime, banks, fintech firms, and nonbank lenders and servicers operating under a bank partnership model should continue to structure their programs in a manner that is consistent with applicable case law in the jurisdictions where the loans are being made, and nonbank lenders should stay abreast of related state law requirements, including loan brokering and debt collector licensing requirements.