May 11, 2021

Toomey: Misguided Attempts to Overturn True Lender Will Hurt Americans’ Access to Credit

Washington, D.C. – U.S. Senate Banking Committee Ranking Member Pat Toomey (R-Pa.) spoke on the Senate floor today to urge his colleagues to oppose S.J. Res. 15, which would overturn the Office of the Comptroller of the Currency’s (OCC) True Lender rule.

Ranking Member Toomey’s remarks, as prepared for delivery:

Mr. President, I rise today in opposition to S.J. Res. 15. This misguided resolution would overturn an important banking regulation—the OCC’s True Lender rule—that helps give consumers greater access to credit.

Overturning the True Lender rule is a bad idea. It would reduce access to credit for consumers, especially those who need it most, stifle innovation, and inhibit the functioning of our nation’s banks and credit markets.

Let me explain why preserving this rule is so important. In the last decade, we’ve seen financial technology companies—fintechs—use technology to revolutionize financial markets. Community and mid-sized banks—who lack resources to develop banking technology in-house—are partnering with fintechs to compete more effectively.

These partnerships benefit consumers. By increasing competition in lending markets, they lower the price of financial products, improve credit options, and expand consumer choice.

Unfortunately, a patchwork of different legal tests in different courts makes it difficult to predict whether the bank or the fintech partner will be considered legally responsible for the loans. Last year, the OCC issued its True Lender rule to provide much-needed regulatory clarity. This rule holds a national bank responsible for a loan if it is named in the loan agreement or it funds the loan.

Some Democrats claim the rule allows unaccountable “rent-a-charter” arrangements. In fact, the rule prevents them. It ensures that national banks are accountable for the loans they issue through lending partnerships, and requires the OCC to supervise the loans for compliance with consumer protection and anti-discrimination laws.

Democrats express concern that the rule will “trap” consumers in arrangements with high interest rates and a principal balance that cannot be paid back. This isn’t possible with OCC-chartered banks, which are the ones affected by this rule. That’s because banks must assess a borrower’s ability to repay before making a loan. So if banks systematically approve loans via fintech partnerships to consumers who can’t repay the debt, they’ll face consequences from their regulator. That’s far more protection than what currently exists for consumers.

Some Democrats claim the True Lender rule fundamentally changes existing laws around interest rates. In fact, it preserves existing law. For over four decades, Federal law has allowed banks to “export” the state law governing interest rates from the home state where they are based. This requires the bank to comply with the one law of the bank’s home state, rather than the 50 different laws of its customer’ states, and facilitates a competitive, national credit market.

The True Lender rule simply allows fintechs to partner with banks, which already operate with these efficiencies. This is not very different than what happens today with credit cards, which as I remind everyone, can also have high interest rates. So if you believe bank-fintech providers shouldn’t be able to “export” interest rates, then you should also want to eliminate credit cards for Americans.

Some Democrats claim the True Lender rule harms low-income consumers. In fact, the True Lender rule benefits low-income consumers the most by preserving their access to well-regulated, bank-issued credit. Absent the rule, uncertainty about which partner is the true lender means uncertainty about what laws apply, and whether the loan will be valid.

Without the rule, the secondary market for these loans would be disrupted, which, again, disproportionately harms lower-income borrowers. How? When a bank sells a loan it frees up capital to make more loans. Banks can issue far fewer loans if they cannot reliably sell them into the secondary market. Fewer loans means more expensive credit and less willingness to provide the limited supply of credit to higher-risk borrowers.

This isn’t just my opinion. 47 leading financial economists, from Harvard, Stanford and other leading universities made exactly these points in an amicus brief supporting the rule. And, we have empirical proof. Studies show after a 2015 court ruling created uncertainty around the ability to export interest rates to New York, it became significantly harder for higher-risk borrowers to get loans in New York.

Some Democrats want to overturn the True Lender rule because doing so would subject more loans to state interest rate caps. In fact, the more likely effect is that these loans simply won’t get made, which ultimately harms low-income consumers the most. The True Lender rule preserves access to well-regulated, bank-offered credit.

At the end of the day, if this CRA is successful, demand for credit won’t disappear. You will simply have made it harder for people who need loans to get them.

Voting in favor of the CRA is a direct assault on fintech. It will make it harder for Congress to legislate here. It will make it harder for regulators to issue guidance and rules that promote fintech. Courts will see it as Congress buying into the notion that fintechs are “predatory” lending. And it will scare away state legislatures from promoting fintech. But if you believe financial innovation is a great thing—then oppose this CRA.

For all of these reasons, I urge my colleagues to join me in voting against S.J. Res. 15.