The laws governing the financial technology ("FinTech") services companies have continued to develop. One prominent business model utilized by FinTech companies involves partnerships with traditional depository institutions, often state-chartered, FDIC-insured community banks.1 In the context of this model, the non-depository FinTech companies and traditional depository institutions act together to offer consumer financial services and products. However, the regulatory response to these partnerships has varied over the years and the change in administration at the national level may have far reaching consequences for these programs.
During the past year, Congress passed a joint resolution repealing the Office of the Comptroller of the Currency's ("OCC") short-lived True Lender Rule pursuant to the Congressional Review Act ("CRA").2 Subsequently, President Joe Biden signed the joint resolution passed by Congress.3 The rule provided a bright-line test for examiners to determine the true lender in bank/nonbank partnerships.4 The True Lender Rule was designed to provide protections regarding when and how a court could decide whether a loan is, or is not, actually made by the originating depository institution when that institution partners with a nondepository entity, such as a FinTech.5 The repeal returns FinTech–bank partner programs to the prior uncertain environment with respect to how these business models will be regulated.
The Federal Deposit Insurance Corporation (the "FDIC") and the OCC established rules about an assignee's ability to assess the interest rates lawfully contracted for by depository institutions.6 The regulations promulgated by these rules clarify that a loan that was "valid when made" will not be rendered usurious by a subsequent transfer.7 The regulations are currently being challenged in the federal courts.8 Many FinTech companies partner with depository institutions and subsequently sell or arrange for the sale of loans from the depository institutions to third-party investors, whether through private loan sales or securitizations. When FinTech programs are added to traditional loan sales, the challenges to these rules have potentially significant consequences to both FinTech business models and traditional depository institutions.9
THE RISE AND FALL OF THE OCC'S TRUE LENDER RULE
THE OCC'S TRUE LENDER RULE10
On October 30, 2020, the OCC issued a final rule establishing a bright-line test to determine when a national bank or federal savings association makes a loan and is the true lender ("True Lender Rule").11 The True Lender Rule took effect on December 29, 2020.12 Under the rule's bright-line test, a covered bank makes a loan and is the true lender if, as of the date of origination, the bank is named as the lender in the loan agreement, or it funds the loan.13 The rule also states that if, as of the date of origination, one bank is named as the lender in the loan agreement but another bank funds the loan, the bank that is named as the lender in the loan agreement is deemed to have made the loan.14
The True Lender Rule was created to provide the legal certainty necessary for covered banks to participate confidently in lending partnerships with third parties, such as FinTech companies.15 Through such partnerships, banks are able to leverage technology developed by third parties and reach a broader customer base, "expand[ing] access to credit and provid[ing] an avenue for banks to remain competitive as the financial sector evolves."16 The True Lender Rule was intended to facilitate these partnerships by defining which party makes a loan and, therefore, clarifying which laws apply to such loans.17
The True Lender Rule's bright-line test was also intended to eliminate doubt created by a "growing body of case law" that had "introduced divergent standards" for determining which entity makes a loan.18 The OCC noted that "[t]his uncertainty may discourage banks from entering into lending partnerships, which, in turn, may limit competition, restrict access to affordable credit, and chill the innovation that can result from these relationships."19 With the True Lender Rule, the OCC hoped that all parties would be able to "reliably determine the applicability of key laws, including the law governing the permissible interest that may be charged on the loan."20
In its rulemaking analysis, the OCC acknowledged concerns that the True Lender Rule would facilitate inappropriate "rent-a-charter" schemes that allow third parties to avoid state consumer protection laws and allow banks to disclaim compliance responsibility for their bank loans.21 The OCC believes that the True Lender Rule does not preempt or interpret state law; it merely interprets existing federal banking law.22 If the covered bank was determined to be the "true lender" of the loan under the True Lender Rule, then the bank would maintain compliance obligations with respect to the loans it makes.23 Conversely, if the True Lender Rule determined that the nonbank partner was the true lender, then that lender would be subject to applicable state lending law and the OCC would continue to assess the covered bank's third-party risk management in connection with the partner relationship.24
DISCORD OVER THE TRUE LENDER RULE
In January 2021, a week after the True Lender Rule went into effect, the attorneys general of New York, California, Colorado, the District of Columbia Massachusetts, Minnesota, New Jersey, and North Carolina filed a federal lawsuit in New York alleging that the OCC's True Lender Rule is unlawful.25 The state attorneys general argued that the rule facilitates predatory lending, preempts state usury laws, and enables "rent-a-bank" schemes.26 The complaint further alleged that the OCC exceeded its statutory authority by adopting the rule.27 Before the OCC could even file a response to their complaint, however, Congress had already begun the process to repeal the True Lender Rule through the CRA.28 By June 30, 2021, the True Lender Rule was repealed through Congress's use of the CRA.29 The decision to rescind the Rule rendered the state attorneys general lawsuit moot and they voluntarily dismissed the litigation against the OCC.30
1 BD. OF GOVERNORS OF FED. RESERVE SYS., COMMUNITY BANK ACCESS TO INNOVATION THROUGH PARTNERSHIPS iv (Sept. 2021), https://www.federalreserve.gov/publications/files/community-bank-access-toinnovation-through-partnerships-202109.pdf (stating that community banks are "increasingly partnering with third-party financial technology companies (fintechs) to access innovation").
2 S.J. Res. 15, 117th Cong. (2021).
4 National Banks and Federal Savings Associations as Lenders, 85 Fed. Reg. 68742 (Dec. 29, 2020) (to be codified at 12 C.F.R. § 7.1031).
5 See id. at 68742.
6 12 C.F.R. § 7.4001(e) (2021); id. § 160.110(d); id. § 331.4(e).
7 See supra note 6.
8 See Complaint, California v. Fed. Deposit Ins. Corp., No. 4:20-cv-05860 (N.D. Cal. Aug. 20, 2020); Complaint, California v. OCC, No. 4:20-cv-05200 (N.D. Cal. July 28, 2020).
9 Permissible Interest on Loans That Are Sold, Assigned, or Otherwise Transferred, 85 Fed. Reg. 33530, 33532 ( June 2, 2020).
10 The FDIC did not issue a True Lender Rule for state-chartered banks. See Leonard Chanin, Deputy to the FDIC Chairman (Dec. 2020), https://www.pli.edu/programs/consumer-financialservices-institute?t=ondemand&p=278961 (answering a question at a Practicing Law Institute presentation in December 2020) ("Our authority to determine true lender is not parallel to that of the OCC. That is, we do not have the same, if you will, preemptive authority that the OCC has. The OCC has the authority to determine when a loan is, quote, 'made.' We do not have that same authority under the FDIC Act. We have the authority to determine valid-when-made under the statute, but we simply don't have the ability to decide or to state that if a bank, for example, originates a loan, is on the paper, the note, that it is a true lender regardless of what state laws or other court decisions in other jurisdictions may state.").
11 National Banks and Federal Savings Associations as Lenders, 85 Fed. Reg. 68742, 68743 (Dec. 29, 2020) [hereinafter True Lender Rule].
12 Id. at 68742.
13 Id. at 68747 (formerly codified at 12 C.F.R. § 7.1031(b)).
14 Id. (formerly codified at 12 C.F.R. § 7.1031(c)).
15 Id. at 68742.
17 Id. at 68744.
18 Id. at 68742. Compare CFPB v. CashCall, Inc., No. CV157522JFW, 2016 WL 4820635, at *6 (C.D. Cal. Aug. 31, 2016) (holding that in identifying the true or de facto lender, courts generally consider the totality of the circumstances and apply a "predominant economic interest," which examines which party or entity has the predominant economic interest in the transaction), with Beechum v. Navient Sols., Inc., No. EDCV 158239JGBKKx, 2016 WL 5340454, at *8 (C.D. Cal. Sept. 20, 2016) (holding that the court will look "only to the face of the transactions at issue").
19 True Lender Rule, supra note 11, at 68742.
21 Id. (stating "'[R]ent-a-charter' lending schemes [are] arrangements in which a bank receives a fee to 'rent' its charter and unique legal status to a third party. These schemes are designed to enable the third party to evade state and local laws, including some state consumer protection laws, and to allow the bank to disclaim any compliance responsibility for the loans.").
22 Id. at 68743.
23 Id. at 68743–44.
24 Id. at 68743.
25 See Complaint, People v. OCC, No. 1:21-civ-00057-SHS (S.D.N.Y. Jan. 5, 2021).
26 See id. at 4.
27 See id. at 7.
28 S.J. Res. 15, 117th Cong. (2021); Answer to Complaint, People v. OCC, No. 1:21-cv-00057- SHS (S.D.N.Y. Apr. 14, 2021).
29 S.J. Res. 15, 117th Cong. (2021); Cong. Review Act, 5 U.S.C. §§ 801–808 (2018).
30 Stipulation of Voluntary Dismissal, People v. OCC, No. 1:21-cv-00057-SHS (S.D.N.Y. July 9, 2021)
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