On July 20, 2020, the Office of the Comptroller of the Currency (OCC) issued a notice of proposed rulemaking that would establish when national banks or federal savings associations (collectively, banks) are the "true lender" when making a loan, in the context of a partnership between the bank and a third party. Recognizing the uncertainty created by existing case law and lack of regulatory guidance, the OCC proposes that the bank will be treated as the "true lender" if, as of the date of origination, the bank is named as the lender in the loan agreement or the bank funds the loan.
Banks are permitted to enter into contracts, to make loans, and to subsequently transfer the loans and assign loan contracts. Banks also are permitted to rely on third-party service providers for marketing, loan servicing, and other "non-ministerial" lending activities. Federal law does not delineate how to determine which entity is the "true lender," meaning the entity that actually makes the loan. Earlier this year, in its rule reaffirming the "valid when made" doctrine, the OCC expressly declined to resolve the "true lender" question.
Borrowers have attempted to create their own definition in pursuing usury claims based on the theory that the non-bank partner is the "true lender"; the non-bank partner is not a chartered entity and therefore cannot export the interest rate of its home state, so the interest rate is usurious under state law. As the OCC recognizes, the result of these suits and the absence of regulatory authority has created "divergent standards" for identifying the true lender. Some courts have looked to the form of the transaction, while others have applied "fact-intensive balancing tests" without any "predictable, bright-line standard."
The OCC advises that it is issuing its proposed rule to "address this uncertainty," which may discourage lending relationships with third parties and restrict access to credit.
The Proposed Rule
In the notice of proposed rulemaking, the OCC proposes that if a bank is named in the loan agreement as the lender as of the date of origination, the bank has conclusively exercised its authority to make loans. The OCC further proposes that if a bank funds a loan as of the date of origination, the bank has the predominant economic interest in the loan—and thus has made the loan—irrespective of whether the bank is the named lender in the loan agreement as of the date of origination. The proposed rule specifies that the bank's status as the true lender of the loan would not be affected by a subsequent transfer of that loan.
According to the OCC, the proposed rule would enable banks to exercise their lending authority and enable stakeholders to reliably and consistently identify the legal framework that would be applicable to the loan. The OCC notes that when the bank is the true lender making a loan, "a robust Federal framework applies to ensure that banks are lending in a safe and sound manner," and the OCC would operate as the prudential regulator of the bank's lending activities. The OCC also emphasizes its longstanding directives that use of third parties does not impact the bank's responsibility to ensure the activities comply with safety and soundness requirements and that banks must institute appropriate safeguards to manage risks associated with third-party relationships. The OCC sets out in the proposed rule key factors it looks to in evaluating a bank's lending relationships with third parties in the supervision process.
In the proposed rule, the OCC reiterates what it describes as its "multifaceted" prudential oversight of bank lending, including ensuring prudent underwriting standards and compliance with federal consumer protection and fair lending laws and taking steps to eliminate predatory, unfair, and deceptive lending practices.
If finalized as proposed, the rule would provide certainty for marketplace lenders offering loans and other financial products through partnerships with banks, as well as for banks that have or are considering entering into these partnerships. The OCC appears to recognize that consumer groups and states will challenge this bright-line approach, setting out in detail how it deploys its supervisory and enforcement authority to protect consumers.
The OCC's proposed rule would apply to all national banks and federal savings associations. The deadline to submit comments is September 3, 2020.
Brian Fritzsche has contributed to the drafting of this client alert.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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