Congressional Lawmakers Seek to Overturn the OCC’s “True Lender” Rule
Congressional Democrats recently introduced resolutions that would overturn the Office of the Comptroller of the Currency’s “True Lender Rule” (TLR), which became effective on December 29, 2020. The Senate version of the bill was introduced by Senator Chris Van Hollen (D-MD) and was co-sponsored by six other Senate Democrats, including the Chair of the Senate Banking Committee, Sherrod Brown (D-OH). An identical bill was introduced in the House by Rep. Chuy Garcia (D-IL), a member of the House Committee on Financial Services.
The resolutions seek review of the TLR under the Congressional Review Act, which provides Congress with review and approval authority over federal agency rules. Under the act, Congress must act on agency rules within 60 “session days” beginning on the later of the date received by Congress or the date of publication in the Federal Register. Because the original 60-day period did not expire before the end of the last session of Congress, lawmakers have another 60-day period to act, which began on January 3, 2021 with the new session of Congress.
If either resolution passes in both Chambers, the TLR would be effectively nullified and the possibility of the OCC adopting a comparable rule would be foreclosed. Should the effort fail in Congress, the Biden Administration could direct the OCC to revisit the TLR—which may result in its repeal or substantial modification.
The TLR was the last in a series of rules intended to provide financial institutions and non-bank debt purchasers (including purchasers of credit card receivables and securitizers) with certainty in the wake of the Second Circuit’s decision in Madden v. Midland Funding, LLC. In Madden, the court held that federal banking laws preempt state usury laws only so long as the loan remains in the hands of a national bank. As a result, loans that were subsequently sold or assigned to an entity other than a national bank were unable to benefit from federal preemption. Many have argued that the uncertainty resulting from the Madden decision limited competition, chilled partnerships that resulted in innovation, and restricted access to affordable credit.
Last summer, the OCC issued a final rule that codified the concept of “valid-when-made.” Under that rule, when a bank transfers a loan, interest permissible before the transfer continues to be permissible after the transfer—which allows subsequent non-national bank entity purchasers, assignees, and transferees to benefit from federal preemption of state usury laws.
But the threshold question of whether a loan was considered to have been made by an OCC-chartered institution remained unresolved prior to adoption of the TLR. In answering that question, the TLR stipulates that a bank makes a loan and is considered the “true lender” if the bank (1) funds the loan or (2) is named as the lender in the loan agreement. In the event of a discrepancy between the two, the loan agreement prevails.
While many political commentators believe that congressional-level efforts to overturn the TLR are intended to be political tactics and thought passage of these measures is ultimately unlikely given the slim majority of Democrats in the Senate, it is important to note that lawsuits challenging the TLR have already been filed by attorneys general in eight states and the District of Columbia.