The OCC's true lender rule, codified to 12 C.F.R. § 7.1031, provides that a national bank or federal savings association makes a loan when the bank is named as the lender in the loan agreement or funds the loan. The rule is designed to eliminate uncertainty as to which entity – e.g., the bank or its FinTech partner, such as a marketplace lender – makes a loan. The distinction is important because while national banks and federal savings associations are permitted to charge the maximum interest rate permissible in the state in which they are located and to "export" that interest rate to borrowers in other states, non-bank FinTechs do not enjoy similar federal preemption of state usury laws. The new true lender rule is intended to operate in tandem with the OCC's "Madden-fix" or permissible interest rate rule, on which we have previously reported, which provides that the interest on a loan issued by a national bank or federal savings association "shall not be affected by the sale, assignment, or other transfer of the loan" (e.g., to a FinTech partner).
The FDIC issued a similar permissible interest rate rule in 2020 but has not issued a true lender rule.
All three rules are now embroiled in litigation brought by state attorneys general. States brought lawsuits challenging the OCC's permissible interest rate rule in July and the FDIC's permissible interest rate rule in August. Through these lawsuits, and now the true lender lawsuit, states seek to ensure that they can continue to enforce state usury laws against non-bank partners to whom bank-originated loans have been sold, assigned, or transferred. As the lawsuit filed this week puts it, "This case involves an unlawful attempt by the Office of the Comptroller of the Currency ('OCC') to facilitate predatory lending by depriving the States of one of the most effective methods of deterring such conduct – state usury and usury-evasion laws."
Obviously, banks, their current and potential FinTech partners, and the OCC see it very differently than the state attorneys general. Banks and FinTechs should monitor the outcomes of the pending lawsuits. Until there is further legal clarity, it is likely that banks and FinTechs will be reluctant to rely upon the new OCC and FDIC rules.
The uncertainty caused by lawsuits against federal regulators is compounded by the outcome of recent elections. A Democratic Congress could seek to overrule the true lender rule, which only recently became effective on December 29, 2020, through the Congressional Review Act process. In addition, a new OCC Comptroller nominated by President Biden and confirmed by the Senate might repeal or modify the true lender rule (and the OCC's permissible interest rate rule, for that matter). Whether Acting OCC Comptroller Brian Brooks, who has championed OCC's new rules, will become and remain the Comptroller of the Currency during the Biden Administration is unclear. President Trump recently nominated, and, on January 3, 2021, renominated Mr. Brooks to serve as OCC Comptroller for a five-year term. Assuming that Mr. Brooks is confirmed as Comptroller in the final days of the Republican Senate, President Biden would be able to remove him from office "upon reasons to be communicated by [the President] to the Senate." This presidential power to remove the OCC Comptroller from office has not previously been tested in the courts, although the Supreme Court's decision last year in Seila Law LLC v. CFPB suggests, in dicta, that the President may be able to remove the OCC Comptroller from office for any reasons communicated to the Senate if he is in a "firing mood."
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