Update: Senate Votes to Repeal “True Lender” Rule

Late last year, we wrote about the issuance of the “true lender” rule by the Office of the Comptroller of the Currency (OCC), which went into effect in December 2020.  Prior to the issuance of that rule, federal courts had differed as to whether third-party lenders were subject to state usury laws when loans they finance were nominally originated by a national bank. (National banks themselves are exempt from many state usury statutes). In an effort to resolve the widespread confusion, the OCC issued the “true lender” rule, which clarified that where a national bank makes a loan, the bank is considered the true lender if, as of the date of origination, the bank funds the loan or the bank is named as the lender in the loan agreement. See 12 C.F.R. § 7.1031. Perhaps most importantly, the bank is still considered the true lender, even if another bank or third-party lender actually finances the loan.

The “true lender” rule was immediately met with criticism. In January 2021, seven state Attorneys General, including Massachusetts Attorney General Maura Healey, sued the OCC in the United States District Court for the Southern District of New York.  The AG plaintiffs sought to invalidate the rule. The AGs and other critics argued that the “true lender” rule enabled predatory lenders to prey upon unsuspecting customers by facilitating “rent-a-charter” arrangements. Such arrangements allow a third-party lender to “rent” a national bank’s charter for a fee, which in turn enables the third-party lender to avoid certain state usury limits.

On May 11, 2021, the Senate voted 52-47 to pass a resolution to repeal the “true lender” rule. Senate backers of the resolution echoed the same sentiments as the rule’s first critics. The resolution is currently pending in the U.S. House of Representatives, where it is expected to pass.

We will continue to monitor and report on this important, evolving issue.

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