US Senate votes to repeal Trump-era banking rule 'true lender'

Lawmakers voted 52-47 to repeal the “true lender” rule that Democrats say allows predatory lenders to skirt state consumer protections regulations.

The rule, issued by the Office of the Comptroller of the Currency (OCC) in October last year, determines when a national bank or federal savings association (bank) makes a loan and is the “true lender,” including in the context of a partnership between a bank and a third party

The rule was intended to clarify whether state or federal laws applied when lenders like fintechs partnered with traditional banks.

The resolution repealing the rule now heads to the Democratic-led House, where it is also expected to pass. Once passed and signed by President Joe Biden, this will mark the first roll-back of a Trump-era financial rule using the Congressional Review Act, a 1996 law that gives Congress the ability to rescind recently enacted regulations.

The White House said that it supports the passage of the repeal resolution, arguing that the OCC’s rule “undermines state consumer protection laws and would allow the proliferation of predatory lending.”

Democrats and consumer advocates had for long warned that the rule would allow predatory lenders to skirt state usury laws and interest rate caps by partnering with national banks.

The OCC, while drafting the rule had said it was aiming to provide legal certainty to lenders as to whether state or federal laws applied to their business.

The ‘true lender’ rule determined that if the bank is named as the lender in the loan agreement, then the relevant bank rules apply, giving flexibility to freely lend in partnerships with national banks operating under federal regulations.

“States are taking measures to protect their constituents their consumers against these end-runs around their laws designed to prohibit these predatory practices. But last October, in the middle of the pandemic, when many working families were plunged into economic uncertainty and turmoil, the Trump administration gave these rent-a-bank schemes a free pass to exploit these loopholes,” said Sen. Chris Van Hollen (D-Md.), sponsor of the resolution to repeal the rule.

Earlier, during the 2000s, the OCC had clamped down on the `rent-a-bank’ schemes, in which a lender temporarily partners with a bank to evade interest rate caps and then severs the partnership after taking ownership of the loan. Critics of the true lender rule say it will allow such schemes to flourish, particularly as non-bank online lenders make up a larger portion of the financial system.