OCC Proposes Rule to Define the ‘True Lender’

Financial Services Law

On the heels of finalizing its Madden-fix rule, the Office of the Comptroller of the Currency (OCC) on July 20, 2020, issued a proposed regulation to address bank-partnership uncertainty arising from the so-called true lender theory. The proposed rule provides that a national bank or federal savings association is the “true lender” if, as of the date of origination, it is named as the lender in the loan agreement or it funds the loan. Comments on the proposed regulation are due by September 3, 2020.

What happened

Many fintechs and other nonbanks have elected to offer loans in partnership with banks rather than making the loans themselves. By doing so, they can reduce the substantial cost of complying with widely varying state laws and obtaining state lending licenses, and offer more uniform products on a national basis. However, because these structures can allow loans to be made at interest rates exceeding state usury thresholds, they have been attacked by consumer advocates and state regulators. As relevant here, critics have brought cases arguing that the banks are not the true lenders, so the banks’ role in making the loans should be disregarded for federal preemption purposes. These cases have caused uncertainty in the marketplace, discouraging institutional investors from financing bank partnership arrangements and reducing credit available to consumers.

In announcing the proposed rule, the OCC explained that the absence of federal guidance on who is the true lender has led to courts adopting “divergent standards” ranging from “conclud[ing] that the form of the transaction alone resolves this issue” to fact-intensive, multifactor balancing tests. The proposed rule would eliminate this uncertainty by adopting a bright-line standard. First, the fact that a loan agreement names the bank as the lender as of the date of origination would be viewed as “conclusive evidence” that the bank made the loan. Second, even if the bank is not the named lender in the loan agreement, if a bank funds a loan as of the date of origination, the OCC would “conclude[] that the it has a predominant economic interest in the loan and, therefore, has made the loan.” Third, the bank’s status as the true lender would be cemented as of the origination date and could not be altered by a subsequent transfer of the loan.

Anticipating potential concerns that the proposed rule would encourage predatory lending, the OCC explained that as the lender, the bank is responsible for ensuring the loan is made in compliance with applicable laws and regulations, including federal consumer protection laws, “even if the loan is made in the context of a third-party partnership and even if the bank’s partner is the customer-facing entity.” The OCC further emphasized that “any lending practices that take unfair advantage of borrowers, or that have a detrimental impact on communities . . . conflict with the high standards expected of [banks].”

Why it matters

The legal uncertainty resulting from the true lender theory has had a chilling effect on bank partnerships and the resulting innovation from these partnerships. The proposed rule holds the promise of resolving the uncertainty that remains for national banks and federal savings associations after the Madden-fix rule. Although the proposed rule does not apply to state-chartered banks, Federal Deposit Insurance Corporation Chair Jelena McWilliams stated during the board meeting on June 25, 2020, that the FDIC would address the true lender doctrine in a rulemaking. Whether the FDIC’s rulemaking will be similar to the OCC’s proposed rule remains to be seen.

With this rulemaking, the OCC is continuing its aggressive push under Acting Comptroller Brian Brooks to align the realities of interstate fintech lending with traditional regulations imposed by states to protect their consumers from interest rates and fees that exceed state law.

We encourage our clients to comment favorably on the regulation, and we stand ready to assist as needed.

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