Loan Market Update # 10: OCC’s True Lenders Rule Repealed | Cadwalader, Wickersham & Taft LLP
On June 30, 2021, President Biden signed a joint resolution of Congress under the Congressional Review Act (“CRA”) to disapprove of the OCC’s True Lender Rule. As a result, the true lender rule is now repealed.
The True Lender Rule was published in the Federal Register on October 30, 2020. According to the OCC, the rule was intended to clarify the market confusion that arises when a national bank partners with a non-bank lender, such as a market lender. Determining which entity is making the loan (or is the “real lender”) determines which laws apply to loans. The real lender rule was that a national bank is the real lender if, on the inception date, (1) the national bank is named as the lender in the loan agreement for a loan and another bank funds that loan. loan, or (2), the national bank itself finances the loan.
As Cadwalader previously pointed out, the Congressional Review Act gives Congress expedited procedures for reviewing agency regulations. With this, Congress is empowered to pass disapproval resolutions which, when signed by the president, prevent an agency’s rule from taking effect or continuing. In essence, when the president signs a joint resolution, it is as if the rule has never taken effect. Further, the repealed rule “cannot be reissued in substantially the same form, and a new rule which is substantially the same as such a rule cannot be issued, unless the new rule or rule is expressly authorized. by a law promulgated after the date of the joint resolution disapproving the initial rule.
The House passed its joint resolution on June 24, 2021, and the Senate passed its resolution on May 11, 2021. President Biden signed the resolution on June 30, 2021, ending the rule’s effectiveness. Now, the patchwork of court rulings made prior to the rule’s publication by the OCC will control the lender’s true determination and decide which law applies.
As previously stated, we believe the repeal of the True Lender Rule is largely symbolic and the risks for market lending remain basically the same. With this, the best ways to mitigate the risks associated with the challenges of bank-sourced model loans are to: (1) ensure that loan agreements have strong arbitration clauses reflecting the contractual agreement to arbitrate. any claim and not authorize arbitration of claims on the basis of a class action suit, and (2), by limiting interest rates below the threshold generally targeted by the CFPB and State AGs ( usually 36%).
1 For a discussion of the bank origination model, see our Clients & Friends Memo, Marketplace Lending Update: Who’s My Lender? (March 14, 2018).
2 2 CFR 7.1031 (b).
3 For more information on the Congressional Review Act, see Customer and Friends Memo, Marketplace Loan Update # 9: Being True to Yourself? Not necessarily (May 21, 2021).
4 5 USC § 801 (f).
5 5 USC § 801 (b) (2).
6 See supra note 3.
7 See American Express Co. et al v. Italian Colors Restaurant et al., 570 US 228 (2013) (considering that the Federal Arbitration Act does not allow courts to invalidate a contractual waiver of collective arbitration on the grounds that the cost to the claimant of the individual arbitration is claim under federal law exceeds potential recovery).