‘CRA-ing’ the OCC is a terrible idea
Using the Congressional Review Act (CRA), the U.S. Senate recently voted to invalidate a recent Office of the Comptroller of the Currency (OCC) regulation that was set to clarify when a national bank is considered to be the “true lender” making a loan. This clarity is important because some courts have taken to invalidating loans made by banks and then sold to partners on the grounds that the banks were not the true lenders with the “predominant economic interest.”
Opponents of the OCC’s rule argue that it preempts state law, encourages “predatory” lending by facilitating “rent-a-bank” charters and that its elimination would protect consumers. But this is not the case, and using the CRA to get rid of it is likely to do more harm than good.
First, the rule does not preempt state law. It clarifies the application of the powers of national banks under federal law to make loans nationwide, as well as their power to then sell those loans. Yes, the rule implicates a state’s power to regulate lending, but this stems from Congress’ choice to exempt national banks from state-by-state interest rate regulation.
The wisdom of that policy can be debated, but any change should come from Congress amending the underlying law. Getting rid of the OCC rule doesn’t resolve the validity of these loans — if anything, it prolongs the uncertainty.
Second, the rule does not enable “rent-a-bank” schemes. Its opponents, including 25 attorneys general, worry that it will allow banks to enter into “sham” relationships with partners who will effectively use banks as ciphers to provide loans while avoiding state usury law.
However, it isn’t clear just what makes a bank relationship a “sham.” The AGs approvingly cite a line of cases that looks to whether the bank has the predominant economic interest in the loans, based on factors such as “which party uses its own money to fund the transaction and who holds the ultimate financial risk.”
But is this the right standard? As Professor Charles Calomiris pointed out in congressional testimony, there are many legitimate reasons why banks make loans with the intent to sell them, or the economic interest in them. Such arrangements can help banks manage risk and diversify, and they allow banks that are good at lending but lack a large deposit base or servicing capacity to responsibly extend more credit.
Securitization, which funds billions of dollars of credit card, car, mortgage and other loans, is a major example of banks selling the economic interest of loans away from the federally insured banking system to risk-seeking investors. Does this mean that these securitized loans are “shams” and the investors who purchased them are the “real lenders”?
Two recent cases in federal district court in New York rejected the idea, though obliquely. They ruled that while the banks had sold the economic interest in the loans, because they retained the accounts and control over who got credit and on what terms, the loans remained bank loans — implicitly rejecting the “predominant economic interest” standard in favor of looking at which party exercised ultimate control over the lending process.
Who controls the loan is the better standard. The OCC rule explicitly requires banks to exercise appropriate control and only make loans consistent with the high standards that apply to national banks. The OCC has shown itself willing to bring enforcement actions against banks that fail to exercise proper control.
Third, as Prof. Calomiris noted, the ability of banks to sell loans helps make more credit available, especially to marginal borrowers — but only if buyers know the loans will remain legally valid. The uncertainty that getting rid of the rule would create would hurt that. There is evidence that such uncertainty reduces funding for these types of loans, which may lead to increased bankruptcies among people who cannot get credit to address other debt, such as medical debt.
Finally, even if one objects to the rule, the use of the CRA will not fix the problem and may make it worse. Under the CRA, if a rule is disapproved, the agency may not promulgate one that is “substantially the same” or takes “substantially the same form” unless authorized by Congress. It is unclear how far that prohibition sweeps, but the OCC may be hesitant to try again.
The power of national banks to make and sell loans is granted by federal law, and the OCC is tasked with interpreting that law. Making it harder for the new comptroller to put forward a new rule will force it to be resolved by litigation, which will take years and harm borrowers. Efforts to “CRA” the rule should be rejected.
Brian Knight is the director of innovation and governance and a senior research fellow at the Mercatus Center at George Mason University.