The NCSL Blog

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By Tres York

States will keep regulatory control over certain loans after the U.S. House of Representatives followed the Senate last week in repealing a regulatory rule that would have allowed financial technology lenders to partner with banks and ultimately avoid state banking laws.

pile of cashThe rule was repealed using the 1996 Congressional Review Act, which allows Congress to pass a joint resolution repealing federal regulations by a simple majority vote in both chambers.

In October 2020, the Office of the Comptroller of the Currency (OCC) issued a final rule on National Banks and Federal Savings Associations as lenders, saying the rule would provide certainty as to which entity is the responsible party for loans that are issued through partnerships between banks and third-party, non-bank lenders.

Known as the “true lender” rule, the regulation clarified that the true lender of the loan would be the party named as the lender on the loan agreement or that funded the loan. Consumer advocates have warned about “rent-a-bank” partnerships where non-banks use the partnerships with national banks to distribute high-interest or small payday loans in states that may have stricter usury laws.

Supporters of the rule argue it provided a clear legal standard for banks and financial technology lenders while ensuring the banks are still complying with federal law. Opponents of the rule, including the Conference of State Banking Supervisors (CSBS), argue that the rule allows fintech companies to evade state interest rate caps and other regulations by entering into a temporary alliance with a federally insured bank.

National banks or Federal Deposit Insurance Corporation (FDIC)-insured state banks can issue loans with the maximum interest rates of the state in which they are headquartered, and charge those rates when lending to consumers in other states with stricter interest rate caps. Even though the non-bank lender would deal almost exclusively with the consumer, they would not be considered the “true lender.”

Eighteen states and the District of Columbia currently cap payday loan interest at 36% or lower according to the Center for Responsible Lending. In Congress, Senator Sherrod Brown (D-Ohio) has vowed to reintroduce legislation capping interest rates on loans for all consumers at 36%, with the legislation being modeled after the Veterans and Consumers Fair Credit Act that was introduced in 2019. The 2006 Military Lending Act capped loans at 36% for all active-duty service members.

The resolution now heads to President Biden’s desk where he is expected to sign it.

Tres York is a policy specialist in NCSL's State-Federal Program.

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About the NCSL Blog

This blog offers updates on the National Conference of State Legislatures' research and training, the latest on federalism and the state legislative institution, and posts about state legislators and legislative staff. The blog is edited by NCSL staff and written primarily by NCSL's experts on public policy and the state legislative institution.