The House Must Be True to the Credit Needs of American Families and Entrepreneurs

As America shows its resilience and recovers from a devastating pandemic, many American families and entrepreneurs need credit to rebuild their lives and livelihoods. One would think the last thing the nation’s lawmakers would want to do is impose legal uncertainty to hamper the flow of credit to those who need it most.

Yet this is just what Congress seems poised to do. The Senate voted last month to overturn the “true lender” rule, which clarified that smaller banks could partner with outside firms to offer credit using the same legal framework under which big banks have long issued credit cards. To ensure that credit flows to deserving American families and small businesses, the House must reject similar attempts to kill the rule through a Congressional Review Act (CRA) resolution and must leave the Trump administration rule in place.

Finalized late last year by the Office of the Comptroller of the Currency, the rule makes it easier for community banks to utilize financial technology — referred to as fintech — to offer personal and small-business loans to their customers. Big banks already use this technology to offer credit cards nationwide.

Smaller banks most often lack the resources to do this but in recent years have closed the gap through partnerships with innovative fintech firms. As pointed out by a letter to House leaders from banking groups including the Independent Community Bankers of America, “when community banks . . . partner with technology firms, they can efficiently and conveniently deliver services that customers demand, from a bank that customers trust to meet their financial needs.”

Banks partnering with fintech firms is, in fact, an international trend. In the United Kingdom, for instance, the government actively encourages banks to take the “Fintech Pledge” to work with fintech firms to expand consumer credit.

But banks that partner with fintech companies to expand credit in the U.S. frequently find themselves ensnared in red tape. This is because federal courts are divided on whether to treat the loan as originating from the bank or the partnering firm.

This lack of clarity over who is ultimately responsible for the loan for regulatory purposes means that the firms involved in providing them can never be sure of which regulations they will be required to follow. For decades, the National Bank Act has required federally chartered banks to adhere to the interest-rate policies of their home states, but not those of every state in which they might offer financial products. This policy has enabled a national market for credit cards from large banks such as Chase and Citi.

Yet if a federally chartered community bank were to offer a loan outside its state borders, and it partnered with a fintech firm to do so, courts may rule that it is subject to the laws on interest rates and other credit terms of the home state of every borrower it has lent to. This is because a court may rule that the bank is not the “true lender,” and thus the loan is not subject to the National Bank Act’s protection from the red tape of multiple states.

As Brian Brooks, President Trump’s acting comptroller of the currency, who oversaw the drafting of the true-lender rule before he left near the end of the Trump administration, recently testified to the Senate Banking Committee: “In some cases, courts held that a bank was the true lender and thus upheld the enforceability of the transaction against a usury [legal term for exceeding a jurisdiction’s interest rate cap] challenge. In other cases, presenting similar circumstances, courts held that the bank’s involvement was not sufficient to make it the true lender and held the transaction to violate state usury laws.” There is division on this question among and even within federal judicial circuits. The two conflicting cases cited by Brooks — Beechum v. Navient Solutions and CFPB v. Cashcall, Inc. — were issued by the same federal district court in California less than a month apart in 2016.

Becoming ensnared in the laws of multiple states is a huge disincentive for a bank to partner with a firm to offer new lending products. And paradoxically, subjecting such bank partnerships (even potentially) to stringent state interest-rate caps prevents consumers and entrepreneurs from accessing new loans with lower interest rates than they are paying on their credit cards. This is because most credit cards from national banks aren’t subject to these caps, as they are issued in-house at large banks and thus are fully shielded from state interest-rate rules.

So, for example, despite the fact that New York State sets its interest cap at 16 percent per year, a large out-of-state bank can issue New Yorkers credit cards carrying rates that easily exceed that cap, perhaps by a long way. Yet if the true-lender rule is overturned, smaller banks offering residents loans with interest rates of 20 percent — exceeding the state interest cap by just 4 percentage points — may have courts tell them this is not allowed, forcing consumers to either pay the higher rate charged on the large out-of-state bank’s credit card or, quite conceivably, manage without the credit.

The OCC rule fixes this credit disparity by establishing conditions under which banks — even if partnering with fintech firms — would be the “true lender” subject to the same privileges in issuing lending products as large banks. The loan products would also be subject to all regulations governing federally chartered banks, including federal consumer-protection rules. So the horror stories — assuming they’re true and in context as cited by opponents of the true-lender rule — that stemmed from loans issued before the rule was even finalized would be less likely to occur as consumers and entrepreneurs would both have legal remedies in respect of financial products that violated federal rules and have more choices as the market for credit expanded.

As the community bankers’ letter concludes, a CRA resolution to overturn the true-lender rule “would reduce access to affordable credit, harming consumers and the communities in which they live.” Congress should let the rule stand and pursue bipartisan solutions to reduce — not increase — barriers to access to credit and capital for all Americans.

CEI research associate Guy Denton contributed to this article.