Stop in the Name of the Real Lender: President Biden Repeals the OCC’s Real Lender Rule | Morrison & Foerster LLP


On June 30, 2021, President Biden signed a Congressional Review Act (CRA) resolution repealing the OCC’s real lender rule, a clear rule published in October 2020 to simplify the standards governing when a traditional bank in partnership with a non-bank organization is the “real lender”. The rule was that a bank is the true lender if, on the inception date, it (1) is named as the lender in the loan agreement or (2) finances the loan.

The OCC rule was intended to address what the agency saw as “an uncertainty as to how to determine which entity [in a bank partnership] made the loans and, therefore, the laws that apply to these loans. This uncertainty arose in part from disparate legal rules regarding when a non-bank partner is the real lender. Courts and regulators have developed at least two approaches to the real issue of lenders, each multifactorial and offering little certainty on how to structure banking partnerships. In the view of the OCC, its true lender rule “provides[ed] the legal certainty necessary for banks to associate in complete confidence with other market players and meet the credit needs of their customers.

Democrats in Congress thought otherwise. In late March 2021, Senators Sherrod Brown (D-Ohio) and Chris Van Hollen (D-Md.) Introduced a CRA resolution to repeal the OCC True Lender Rule, citing fears that the rule encourages predatory lending and undermines consumer protections adopted at the state level. The Senate adopted this resolution on May 11, 2021 by 52 votes to 47. The joint resolution of the House, presented at the end of March by Congressman Jesús G. “Chuy” García (D-Ill.), Was adopted by 218 votes to 208 on June 24, 2021. Democrats voted unanimously to overturn the OCC True Lender Rule. One Republican — Rep. Glenn Grothman of Wisconsin has joined their ranks.

Under the CRA, Congress can repeal any action of an administrative agency by a simple joint resolution, accompanied by the signature of the president. President Biden’s approval of Congress’s repeal of the OCC’s real lender rule means the OCC cannot “reissue[ a rule] substantially in the same form. . . unless the new rule or rule is expressly authorized by a law enacted after the date of the joint resolution disapproving the original rule.

Although the repeal of Congress eliminates the OCC True Lender Rule, it does not replace that rule with an approach of its own. The effect of the repeal, then, is to return to the patchwork of court decisions that preceded the clear standard of the OCC.

To be clear, the CRA only addressed the OCC’s true lender rule; it did not address the “once granted validity” rules promulgated by the OCC and FDIC earlier in 2020. Under these rules, loans made by financial institutions are subject to the interest rules applicable to these financial institutions, even after the loans are subsequently sold to third parties who could not themselves have made loans under these interest rate rules. The OCC and FDIC rules assume that financial institutions are in fact the real lenders with the capacity to charge the interest rates applicable to loans, so the only question is whether the interest rates can continue to apply to loans after their sale to third parties. The rules were intended to address the uncertainty created by the Second Circuit Court of Appeals in its “Madden“decision. The agencies concluded that the ability to impose interest rates under federal law includes the ability to sell or assign loans with those interest rates. These rules” validate when they are established ”are essential for the liquidity of financial institutions and provide flexibility in the market through securitization. Thus, while the CRA overruled the OCC’s true lender rule, the“ validity once established ”rules agencies remain in place.

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