The U.S. Senate and House of Representatives have jointly proposed overturning the Trump Administration’s “True Lender” final rule (the “True Lender Rule”), as published by the Office of the Comptroller of the Currency (the “OCC”) on October 30, 2020 and effective December 29, 2020. The Congressional Review Act (the “CRA”) gives Congress a limited period of time for each chamber to pass resolutions to overturn the rule, which reverts the regulation to the status quo ante. The True Lender Rule currently provides legal certainty as to federal preemption of state usury caps in certain consumer lending arrangements entered between national banks and nonbanks. If the regulation is overturned, those arrangements would revert to governance by a patchwork of state consumer laws and judicial decisions.
Currently, the True Lender Rule provides that a federally chartered national bank or federal savings association (a “national bank”) is deemed to make a loan when that national bank, as of the date of origination, (1) is named as the lender in the relevant loan agreement or (2) funds the loan. This bright-line test permits national banks and nonbanks to structure consumer lending partnerships predictably so as to avoid state usury laws capping legally chargeable interest rates. Critics of the rule however contend, among other things, that the rule codifies the “rent-a-bank” schemes in response to which “true lender” consumer protection laws evolved.
For background, “rent-a-bank” schemes appeared in recent decades as a way to extend to unregulated nonbanks the usury preemption privileges granted to federally regulated banks, and “true lender” principles emerged in reaction to protect consumers. Loans, generally, must comply with applicable state usury laws. In the interest of smooth interstate commerce, however, the National Bank Act preempts state usury laws as applied to national banks located in states without usury caps and lending into states with usury caps. Subject to some exceptions such as the “valid-when-made” doctrine, nonbank lenders do not have access to this powerful usury preemption feature. In response to this disparity, “rent-a-bank” schemes developed, whereby nonbanks would engage generally usury-exempt federally regulated banks to originate consumer loans, and then immediately following origination, the nonbank would purchase an interest comprising the entirety of the loan, thereby becoming the owner of a usury-exempt loan.
Unfortunately, these arrangements in some cases involved charging very high interest rates, and accordingly, states, courts and federal agencies including the OCC gradually developed “true lender” principles to combat predatory “rent-a-bank” lending. Broadly, and subject to state-by-state variance, “true lender” principles looked toward the substance rather than the form of a consumer lending transaction, finding state usury caps applicable if a nonbank holds the predominant economic interest in a consumer loan, regardless of whether a federally regulated bank originated it. Using this fact-intensive analysis, states were thereby permitted to look past the otherwise applicable federal preemption of state interest caps and bring usury enforcement actions against nonbank agents whose economic interest predominated in predatory consumer loans.
The OCC’s True Lender Rule supplanted those various state laws by setting a national standard which reverted to a straightforward look at the form of a transaction. Regardless of the degree of involvement of a nonbank agent, a national bank is the “true lender” in a national bank-nonbank lending partnership, thereby conferring federal preemption of state usury laws on the transaction, as long as the national bank is named as the lender or funded the loan. Any factual, secondhand predominant economic interest of the nonbank agent is irrelevant to the usury preemption determination.
Most significantly, if Congress overturns the True Lender Rule, the CRA would forbid the OCC from adopting a substantially similar rule in the future. Procedurally, only a few weeks remain under the CRA to muster the votes necessary to overturn the Rule.