Democrats on the Senate Banking Committee on Wednesday targeted a Trump-era rule that they say allows lenders to bypass state interest rate caps and charge high rates to the most borrowers. vulnerable countries.
In question, the rule of the “true lender”, finalized by the Office of the Comptroller of the Currency (OCC) in October.
Under the rule, a bank will be the true lender on loans made in partnership with third parties if, on the inception date, it finances the loan or is designated as a lender in the loan agreement. If a bank is named as the lender in the loan agreement and another bank funds the loan, the first is the real lender, the OCC said last fall.
The rule allows fintechs or other non-bank lenders to offer loans at higher interest rates than the state in which they are licensed by partnering with a bank licensed in a state with a cap of higher interest rate.
Supporters of the rule say it brings regulatory clarity and expands access to credit, while Democrats and consumer advocates Argue it allows non banking to take advantage of vulnerable borrowers.
During Wednesday’s hearing, Senate Banking Committee Chairman Sherrod Brown, D-OH, called on the OCC to revoke the rule, saying it was “rushed” by the acting supervisor of the ‘time, Brian Brooks, and current acting director of the agency, Blake Paulson.
“The last thing we should do is encourage lenders to innovate on their own terms, when we know that just means they get away with not ripping people off,” Brown said in his remarks. introductory. “You can side with online payday lenders and brag about their creativity and avoid the law as they find new ways to prey on workers and their families, or we can stand up for families and small business and state and state attorneys general. lawmakers who said “enough is enough”. “
The hearing follows a resolution from Sen. Chris Van Hollen, D-MD, introduced last month that would revoke the real lender rule through the Congressional Review Act. The law allows Congress to rescind rules issued by federal agencies within 60 legislative days of the rule’s publication.
Sen. Pat Toomey, R-PA, the senior panel member, argued that reversing the rule would exclude high-risk borrowers from the lending system.
“I suspect the motivation for overturning the rule is that it would subject more loans to state interest rate caps, but that may not be the effect,” he said. declared. “I think the most likely effect is that these loans just won’t go out. That is why price controls are not the solution. They will exclude people from the banking system, they will restrict their credit supply. and make it harder for low-income consumers to access the credit they need. “
A “strong competitive market” is the best form of consumer protection, Toomey said.
“Preserving regulatory certainty and clarity through True Lender Rule advances this cause,” he added.
The battle for rule comes as the Biden administration has yet to appoint a new head of the OCC. Brooks, who issued the rule, resigned from the agency in January, leaving Paulson, the former COO of the OCC, to take his place.
Paulson, a strong supporter of the true lender rule, wrote to lawmakers this month about the “misperceptions” surrounding the rule and that rescinding the regulation would have a “negative impact.” according to Politico.
Alysa James, spokesperson for Brown’s office, said it was “outrageous that the current interim controller is defending this nefarious rule.”
“Her letter to Congress is very irregular, inappropriate and contains misleading statements,” she told Politico.
Meanwhile, Brooks, who was recently appointed CEO cryptocurrency exchange Binance.US, told lawmakers during Wednesday’s hearing that any concerns about non-bank or fintech abuse of the real lender rule should be addressed by states. in which they are authorized.
“The same payday lenders and the like that are often criticized are state-licensed companies, and if the state has serious concerns about them, they are, of course, free to revoke their licenses and to take further action, “he said. “The problem here is with price controls, and I would ask you to consider price controls as causing shortages.”
Senate Republicans challenged what they saw as Democrats’ attempt to limit consumer choice over the real lender rule.
“The idea that we should deny people access to loans because they can’t be trusted to make a good decision for themselves – does that sound a little patronizing and patronizing to you? Asked Toomey.
“I don’t see interest as a bad thing,” Brooks said. “If I’m someone with a hit on my credit and need a two-year personal loan to replace my roof or do one of the many things people use these loans for, I don’t think so. not for me to say that’s a bad thing. “
Columbia Business School professor Charles Calomiris told lawmakers that amid the real debate about lenders, fintech-banking partnerships should not be lumped together with payday lenders but should be seen as an alternative to them.
“[These partnerships] direct low-income and low-value borrowers to much lower interest rates. This is what is at stake here. I think we have a pretty serious mis-characterization of these new, very flexible and innovative partnerships that really empower consumers in new ways, ”he said.
Meanwhile, Lisa Stifler, director of state policy at the Center for Responsible Lending, has warned lawmakers not to be fooled by “ploys” dressed in a “fintech aura.”
“The loans that we see are always extremely expensive and extremely predatory,” she said.