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Hey True Lender. Spend a little time with me.

Hey friends and frenemies, John here. Please follow me on my new Peloton (johncollins) and be like our good friend Julie who is doing it to shame me as I combat the inevitable, post-Covid winter Chubby-Boy Summer.

Ok. Yesterday, former Acting Comptroller of the Currency Brian Brooks, fintech star and now the CEO of Binance US testified (again) before the U.S. Congress. This time, it was before the U.S. Senate Banking Committee. The topic: the “True Lender” rule.

Now, we are going to try and do three things today.

  1. Explain True Lender
  2. Explain why people love it or hate it.
  3. Explain what was most Newsy (™) at the hearing and what might come next.

Sound good? Ok.

What is the “True Lender” rule, you might ask.

The rule was intended to stop the practice pejoratively called “Rent a Bank” or “Rent a Charter.” This is when a lender partners with an out of state bank to provide loans to customers in states who have interest rate limits of 36% or less. The banks that companies “rent” or partner with aren’t subject to state interest rate limits. This means they can loan more money at higher interest rates and, theoretically, make more money.

My colleagues at FS Vector produced a full readout of the hearing available here.

As Brooks wrote in his testimony, “[R]ent-a-charter is not a legal or technical concept.” Under his watch, the OCC “took the concept to refer to situations in which a nonbank paid a fee to a bank for the sole purpose of evading legal requirements, without the bank actually being involved in loan underwriting, risk management, or legal compliance. In short, the OCC took ‘rent-a-charter’ to mean an arrangement in which the nonbank was seeking to ensure that no one was actually responsible for consumer protection or other compliance obligations.

The True Lender Rule, which was finalized under Brooks’ comptrollering, is intended to clarify that a bank is the “true lender” when it issues a loan in partnership with a non-bank third party if as of the date of origination, it:

  1. Is named as the lender in the loan agreement or;
  2. Funds the loan.

The OCC argued the rule would provide clarity as to when a bank in such partnerships qualifies as the “true lender.” This means that the federal government could preempt state-law usury laws that would apply to the loan.

What’s to love, what’s to hate

Democrats, most notably Senate Banking Committee Chairman Sen. Sherrod Brown (D-OH), believe the rule actually gives a free pass for lenders, including some fintech companies, to charge “exploitative” interest rates. He noted that there had been bipartisan efforts in the past via the Bush and Obama administrations to crackdown on the practice. A number of state governments did the same. He argues, among other things, the rule usurps state authorities and gives blessing to widen the so-called federal “loophole.” North Carolina Attorney General Josh Stein, also testified, and, not surprisingly, agreed.

It’s important to note that fintech lenders aren’t the only ones who use these partnerships and many fintech companies have committed to offering loans at no more than 36%. The newly-formed American Fintech Council has made this commitment one of their qualifications for membership, for example.

We’ve talked about this before in this most hallowed space: There’s an increasingly negative approach to fintech broadly on the part of Democrats. The argument of protecting “innovation” for innovation’s sake is wearing thin with Dems. Chairman Brown again:

“The OCC also attempted to justify its efforts by claiming that it promotes ‘innovation’ and provides ‘certainty’ to the markets….the last thing we should be doing is encouraging payday lenders to, in their words, ‘innovate’ – we know that just means new ways to get away with ripping people off.”

Further evidence of this reputational degradation: Throughout the hearing a number of Democrats seemed to use payday and fintech interchangeably on a few occasions, even when it was clear they were referring to payday lenders.

But, Republicans don’t agree. Surprise!

The Committee’s Ranking Member, Senator Pat Toomey (R-PA), praised the rule and celebrated developments of Fintech companies for driving innovation. He also argued that partnerships between banks and Fintech firms have improved product reach and filled market gaps.

What’s next

The big news came after the hearing and it’s signaling what might come next.

Chairman Brown said he was increasingly confident that the Senate had the votes to reverse the rule. They could do it via what’s called a Congressional Review Act (CRA) resolution of disapproval, which he and other Democrats introduced in late March. Passage of the resolution would invalidate the final rule. That’s it. Fin.

According to Politico’s Zach Warmbrodt, following the hearing, Brown said, "I am almost certain we're going to do it….We've got to count votes. We are awfully close to 50, or maybe above 50 because there is some Republican interest."

This is, what we call in the biz, "news." No one knew any Republicans were interested in voting for the resolution. It was (still is?) hazy as to whether or not all of the Senate’s Democrats would even vote for it.

TBH, it’s still unclear. No word yet on who the mysterious Republican(s) could be.

But, woah if true.

We’ll know soon enough. As Warmbrodt further noted, Democrats have until late May to get it done on an “expedited basis”.

Finally, I’d be remiss if I didn’t highlight one of the more amazing quotes I have read from a Congressional hearing witness. Quotes do not equal endorsements but this is a real gem:

“I just don't want Jesus to say to America in the judgment, ‘I was hungry and you gave me a payday loan through a rent-a-bank scheme.’” - Dr. Frederick D. Haynes, III.

See you in two weeks and if you’re not on Peloton, follow and reach out on twitter.

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