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On May 19, the House Financial Services Committee held a hearing entitled “Oversight of Prudential Regulators: Ensuring the Safety, Soundness, Diversity, and Accountability of Depository Institutions.” Committee Chairwoman Maxine Waters (D-CA) opened the hearing by expressing her concerns about the “harmful deregulatory actions” taken by the previous administration’s appointees to “roll back key Dodd-Frank reforms and other consumer protections.” She noted, however, that she was pleased that the Senate is moving forward to reverse the OCC’s true lender rule and commented that she has asked House leadership to address the related Congressional Review Act resolution as soon as possible.
Fed Vice Chair for Supervision Randal K. Quarles provided an update on the Fed’s Covid-19 regulatory and supervisory efforts, noting that the Fed has “worked to align [the Fed’s] emergency actions with other relief efforts as the economic situation improves” and is maintaining or extending some measures to promote continued access to credit. When Congresswoman Velazquez inquired how government programs like the Paycheck Protection Program helped to stabilize businesses and improve the overall economy, Quarles answered, “We would have experienced a much deeper and more durable economic contraction, and would have had more lasting economic scarring with closed businesses and defaulting obligations  had those programs not been put in place.”
OCC Comptroller Michael Hsu discussed the agency’s increasing coordination with other federal and state regulators on fintech policy, in addition to OCC efforts to strengthen Community Reinvestment Act (CRA) regulations and address climate change. The OCC has been encouraging innovation, Hsu said, but added that his “broader concern is that these initiatives were not done in full coordination with all stakeholders. Nor do they appear to have been part of a broader strategy related to the regulatory perimeter.” In his written testimony, Hsu emphasized his concerns with providing charters to fintechs, noting that in doing so, it would “convey the benefits of banking without its responsibilities,” but also “that refusing to charter fintechs will encourage growth of another shadow banking system outside the reach of regulators.” Hsu expressed in his oral statement the importance of finding “a way to consider how fintechs and payment platforms fit into the banking system” and emphasized that it must be done in coordination with the FDIC, Fed, and the states. He also explained that “the regulatory community is taking a fragmented agency-by-agency approach to the technology-driven changes taking place today. At the OCC, the focus has been on encouraging responsible innovation. For instance, we updated the framework for chartering national banks and trust companies and interpreted crypto custody services as part of the business of banking.” When Congressman Bill Huizenga (R-MI) asked how the OCC planned to address the “true lender” rule, which would soften the regulations for national banks to sell loans to third parties, Hsu stated that the OCC originally intended to review the rule, but that after the Senate passed S.J.Res. 15 to invoke the Congressional Review Act and provide for congressional disapproval and invalidation of the rule (covered by InfoBytes here), the agency decided to leave it up to congressional deliberation and will monitor it instead.
FDIC Chairman Jelena McWilliams discussed, among other things, the FDIC’s policy of granting industrial loan company charters. As previously covered by Infobytes, the agency approved a final rule in December 2020 establishing certain conditions and supervisory standards for the parent companies of industrial banks and ILCs. McWilliams defended the FDIC’s new rule during the hearing, stating it “ensures that the parent company serves as a source of financial strength for the ILC while providing clarity about the FDIC's supervisory expectations of both the ILC and its parent company.”
NCUA Chairman Todd Harper also outlined agency measures taken in response to the pandemic. Among other things, Harper noted that the NCUA is supporting low-income credit unions through the Community Development Revolving Loan Fund and that the agency is working to strengthen its Consumer Financial Protection Program (CFPP) to ensure fair and equitable access to credit. During the hearing, Harper stated, “there is an increased emphasis on fair lending compliance, and agency staff are studying methods for improving consumer financial protection supervision for the largest credit unions not primarily supervised by the CFPP.”
On May 11, the U.S. Senate passed S.J. Res. 15 by a vote of 52 - 47 to invoke the Congressional Review Act and provide for congressional disapproval and invalidation of the OCC’s “True Lender Rule.” Issued last year, the final rule amended 12 CFR Part 7 to state that a bank makes a loan when, as of the date of origination, it either (i) is named as the lender in the loan agreement or (ii) funds the loan. The final rule also clarified that if “one bank is named as the lender in the loan agreement and another bank funds the loan, the bank that is named as the lender in the loan agreement makes the loan.” (Covered by InfoBytes here.) In applauding the passage of the resolution, Senator Chris Van Hollen (D-MD), who introduced S.J. Res. 15, stated that “strik[ing] down the ‘Rent-A-Bank’ rule will help prevent predatory lenders from ripping off consumers by charging loan-shark rates under deceptive terms.” He noted that the legislation has support from a broad array of stakeholder and consumer protection groups, including a bipartisan group of state attorneys generals and the Conference of State Bank Supervisors, as previously covered by InfoBytes here.
Ranking member of the Senate Banking Committee, Senator Pat Toomey (R-PA) countered, however, that “[w]ithout the rule, the secondary market for these loans would be disrupted, which, again, disproportionately harms lower-income borrowers.” He further added that “[v]oting in favor of the CRA is a direct assault on fintech. It will make it harder for Congress to legislate here. It will make it harder for regulators to issue guidance and rules that promote fintech. Courts will see it as Congress buying into the notion that fintechs are ‘predatory’ lending. And it will scare away state legislatures from promoting fintech.”
S.J. Res. 15 now heads to the House of Representatives for consideration.
On April 21, a coalition of 26 state attorneys general sent a letter urging Congress to exercise its authority under the Congressional Review Act (CRA) and rescind the OCC’s “True Lender Rule” in order to “safeguard states’ fundamental sovereign rights to protect their citizens from financial abuse.” As previously covered by InfoBytes, the OCC’s final rule amended 12 CFR Part 7 to state that a bank makes a loan when, as of the date of origination, it either (i) is named as the lender in the loan agreement or (ii) funds the loan. The final rule also clarified that if “one bank is named as the lender in the loan agreement and another bank funds the loan, the bank that is named as the lender in the loan agreement makes the loan.” In their letter, the AGs expressed concern that the final rule “establishes a simplistic standard to redefine the meaning of ‘true lender,’” enabling predatory lenders to “circumvent” state interest-rate caps through “rent-a-bank” schemes, which would in turn allow banks to act as lenders in name only while passing state law exemptions for banks to non-bank entities. The letter references a complaint filed by eight state AGs against the OCC in January challenging the final rule (covered by InfoBytes here) and argues that in finalizing the rule the OCC “acted in a manner contrary to centuries of case law [and] the OCC’s own prior interpretation of the law,” and seeks to preempt state usury law and “infringe on the States’ historical police powers and facilitate predatory lending.”
In March, both House and Senate Democrats introduced CRA resolutions (see H.J. Res. 35 and S.J. Res. 15) intended to provide for congressional disapproval and invalidation of the OCC’s final rule. The OCC responded on April 14, arguing that “disapproval of the rule would return bank lending relationships to the previous state of legal and regulatory uncertainty, which. . . adversely affects the function of secondary markets and restricts the availability of credit.” The OCC further stated that the final rule is intended to enhance the agency’s ability to supervise bank lending and “does not change bank’s authority to export interest rates” nor does it “permit national banks to charge whatever rate they like” as both federal and state-chartered banks are required to conform to applicable interest rate limits. “Disparities of interest rates from state to state result from differences in the state laws that impose these caps, not OCC rules or actions,” the OCC stressed, adding that “[s]tates retain the authority to set interest rates.” However, the Conference of State Bank Supervisors sent a letter to Congress in support of S.J. Res. 15, disagreeing with the OCC and noting that the final rule, if it stands, would “eviscerate the power of state interest rate caps and rid state regulators of the most effective tool to protect consumers from such predatory lending.”
On January 5, the New York attorney general, along with the attorneys general from six other states and the District of Columbia filed a complaint against the OCC in the U.S. District Court for the Southern District of New York challenging the OCC’s “true lender” final rule. As previously covered by InfoBytes, in October 2020, the OCC issued a final rule addressing when a national bank or federal savings association is the “true lender” in the context of a partnership between a bank and a third party to provide certainty about key aspects of the legal framework that applies. The final rule amends 12 CFR Part 7 to state that a bank makes a loan when it, as of the date of origination, (i) is named as the lender in the loan agreement, or (ii) funds the loan. The complaint argues, among other things, that the OCC exceeded its statutory authority, and “acted in a manner contrary to centuries of case law [and] the OCC’s own prior interpretation of the law.” The attorneys general reject the OCC’s contention that the final rule is intended to address “‘ambiguity’ in provisions of three federal banking statutes that generally authorize National Banks to make loans,” and instead argue that the rule seeks to preempt state usury law and “infringe on the States’ historical police powers and facilitate predatory lending.” The complaint seeks a declaratory judgment that the OCC violated the Administrative Procedures Act and requests the court set aside the final rule as unlawful.
On October 27, the OCC issued a final rule (see also Bulletin 2020-92) addressing when a national bank or federal savings association (bank) is the “true lender” in the context of a partnership between a bank and a third party to provide certainty about key aspects of the legal framework that applies. The final rule generally adopts the test proposed by the agency in July (see InfoBytes coverage here). Specifically, the final rule amends 12 CFR Part 7 to state that a bank makes a loan when it, as of the date of origination, (i) is named as the lender in the loan agreement or (ii) funds the loan. Additionally, the final rule clarifies that if “one bank is named as the lender in the loan agreement and another bank funds the loan, the bank that is named as the lender in the loan agreement makes the loan.” Lastly, the OCC emphasizes that compliance obligations stay with the “true lender” of the loan and “if a bank fails to satisfy its compliance obligations, the OCC will not hesitate to use its enforcement authority consistent with its longstanding policy and practice.”
The rule is effective 60 days after publication in the Federal Register.
On September 3, the California Department of Business Oversight (CDBO) announced a formal investigation into a California auto title lender to determine whether the lender is evading state interest rate caps through a recent partnership with a Utah-based bank. The California Fair Access to Credit Act—enacted in 2019—caps annual simple interest rates on loans between $2,500 and $10,000 made by state-licensed lenders at around 36 percent (covered by InfoBytes here). The CDBO asserts that prior to the new interest rate caps taking effect, the auto title lender frequently made loans carrying interest rates in excess of 100 percent. Rather than reducing its interest rates to comply with the new law, the lender “stopped making state-licensed auto title loans in California,” and instead used “its existing lending operations and personnel” to market and service auto title loans purportedly made by the Utah-based bank. These loans, the CDBO claims, still carry interest rates greater than 90 percent, but because the Utah-based bank is not regulated or supervised by the CDBO it is not subject to the interest rate caps when lending in California. According to the CDBO, its investigation is intended to find out whether the auto title lender’s “role in the arrangement is so extensive as to require compliance with California’s lending laws” and if the arrangement is a “direct effort to evade the Fair Access to Credit Act,” which CDBO contends would be illegal.
On September 2, NYDFS Superintendent Linda A. Lacewell announced the regulator’s opposition to the OCC’s proposed “true lender” rule. As previously covered by InfoBytes, the proposed rule would amend 12 CFR part 7 to state that “a bank makes a loan when, as of the date of origination, it (i) is named as lender in the loan agreement or (ii) funds the loan,” and intends to cover situations where the bank “has a predominant economic interest in the loan,” as the original funder, even if it is not “the named lender in the loan agreement as of the date of origination.” In response, NYDFS issued a comment letter stating that if the proposed rule is enacted, nonbank lenders that are not chartered or licensed by the federal government would be able to “qualify for federal protection from state usury laws” and make high-cost loans with interest rates well above the interest rate normally permitted by New York law. These laws currently make predatory, high-interest lending illegal, and make usurious loans entered into in the state void and unenforceable, NYDFS stated, arguing that the proposed rule would “gut state usury laws and state licensing requirements with respect to unregulated lenders.” NYDFS also stated, among other things, that the proposed rule, if codified, would “effectively sanction so-called ‘rent-a-bank’ or ‘rent-a-charter’ schemes” and allow “unregulated nonbank lenders to launder loans through banks as an end-around consumer-protective state usury limits.” In addition, NYDFS argued that the OCC lacks the authority to issue the proposed rule “because it has failed to comply with the requirements applicable to preemption determinations under federal law and conflicts with Congress’ intent to limit the preemption of states’ consumer protection laws.”
On August 12, the U.S. District Court for the District of Colorado reversed in part a bankruptcy court judgment, concluding that the OCC’s valid-when-made rule applied but that discovery was needed to determine whether a nonbank entity was the true lender. According to the opinion, a debtor corporation commenced an adversary proceeding against a creditor in their bankruptcy, alleging, among other things, that the interest rate of the underlying debt’s promissory note is usurious under Colorado law. The promissory note was executed between a Wisconsin state-charted bank and a Colorado-based corporation, with an interest rate of nearly 121 percent. The note included a choice of law provision dictating that federal law and Wisconsin law govern. A deed of trust, dictating that Colorado law (the property’s location) governs, was pledged as security on the promissory note and incorporated by referencing the terms of the note. Subsequently, the Wisconsin bank assigned its rights under the note and deed of trust to a nonbank entity registered in New York with a principal place of business in New Jersey. The bankruptcy court denied the debtor’s claims, concluding that the Depository Institutions Deregulation and Monetary Control Act (DIDMCA) applied, which dictated the application of Wisconsin law, making the interest rate valid.
On appeal, the district court applied the OCC’s valid-when-made rule (which was finalized in June and covered by a Buckley Special Alert), concluding that “a promissory note with an interest rate that was valid when made under DIDMCA § 1831d remains valid upon assignment to a non-bank.” However, the district court noted that DIDMCA § 1831d does not apply to promissory notes “with a nonbank true lender” and the parties did not “conduct discovery on the factual question of whether [the nonbank entity] was the true lender.” Thus, the court reversed and remanded to the Bankruptcy Court to determine whether the nonbank entity was the true lender.
On July 20, the OCC issued a proposed rule (see also Bulletin 2020-70) that addresses when a national bank or federal savings association (bank) is the “true lender” in the context of a partnership between a bank and a third party in order to clarify uncertainties about the legal framework that applies. Specifically, the proposed rule amends 12 CFR part 7 to state that “a bank makes a loan when, as of the date of origination, it (i) is named as lender in the loan agreement or (ii) funds the loan.” The OCC notes that the proposal intends to cover situations where the bank “has a predominant economic interest in the loan,” as the original funder, even if it is not “the named lender in the loan agreement as of the date of origination.”
In response, the Conference of State Bank Supervisors (CSBS) issued a statement opposing the proposal, stating that “the true lender doctrine is and should remain a matter of state law.”
As previously covered by InfoBytes, the OCC and the FDIC recently issued final rules clarifying that whether interest on a loan is permissible under federal law is determined at the time the loan is made and is not affected by the sale, assignment, or other transfer of the loan, effectively reversing the U.S. Court of Appeals for the Second Circuit’s 2015 Madden v. Midland Funding decision. At the time, both agencies chose not to address the “true lender” issue.
On March 21, the U.S. District Court for the District of Colorado held that the Federal Deposit Insurance Act (FDIA) does not completely preempt a Colorado state regulator’s claims that a non-bank lender violated state law and remanded the case back to state court. The underlying action results from charges brought by the administrator of Colorado’s Uniform Consumer Credit Code against a non-bank lender – which the administrator argues is the “true lender” of loans issued by a New Jersey-chartered bank – for allegedly overcharging interest and other fees in violation of state law. In granting the motion to remand, the court noted that the administrator sufficiently alleged the non-bank was the “true lender” of the loans in question as the non-bank provided the website through which customers apply for the loans, determined the criteria for marketing the loans, decided which applications receive loans, and purchased the loans within two days after they were made by the New Jersey bank. The district court concluded that while courts are split as to banks, because the true lender of the loans was a non-bank, complete preemption by FDIA does not apply even though the non-bank lender has a “close relationship” with a state or national bank. The district court also stated that whether the non-bank is a “true lender” is “not relevant to the issues of complete preemption, which determine whether remand is warranted.”