On October 27, 2020, the Office of the Comptroller of the Currency (OCC) issued its final rule setting the test for determining who the 'true lender' is in a loan transaction, including in the context of a lending partnership between a federally-chartered bank and a non-bank third party. The final rule adopts the two-pronged test set forth in the OCC's proposed 'true lender' rule issued in July of this year - a bank is the 'true lender' if, as of the date of origination, the bank (1) is "named as the lender in the loan agreement," or (2) "funds the loan." The rule further clarified that if one bank funds the loan but another bank is named as the lender in the loan agreement, the bank identified in the loan agreement will be considered the 'true lender' of the loan. That clarification is consistent with the fundamental rule of the Truth-in-Lending Act, which always makes the party on the loan agreement the "creditor" on that loan.
The OCC's final 'true lender' rule, along with its recent 'valid-when-made' rule, is another step towards streamlining regulations for national banks, while also paving a clearer path for fintech and other non-bank entities to partner with national banks to facilitate consumer loans. Over the years, these partnerships have been troubled because of uncertainty about who the true lender is. Typically, the partner bank makes and funds the loan pursuant to its underwriting guidelines and then sells all or part of the loan to the third party, which often services the loan. Critically, the third party relies on the originating bank's federal preemption rights, particularly to extent the interest rate would exceed applicable state usury laws. The OCC's final rule is aimed at providing clarity for entities currently engaged in or seeking to enter into these lending partnership arrangements.
Not surprisingly, the OCC's final rule was met with swift and harsh criticism from consumer advocates who continue to argue that it will foster predatory lending through 'rent-a-bank schemes' and other lending partnership arrangements. Anticipating this backlash, the OCC made clear in its final rule that the bank, as a true lender of a loan, retains the compliance obligations associated with origination. Instead, the OCC states that it is "providing the legal certainty for banks to partner confidently with other market participants and meet the credit needs of their customers."
The OCC's stated goals of increasing access to credit and fostering innovation in the lending market are not likely to stave off legal challenges to its final rule. Shortly after the OCC issued its final 'valid-when-made' rule, the attorneys general for California, New York and Illinois filed suit in the Northern District of California to block the rule. We should anticipate similar challenges to the 'true lender' rule to be filed in the near term.
It is notable that the Federal Deposit Insurance Corporation ("FDIC"), which acted in step with the OCC by issuing its own 'valid-when-made' rule for state-chartered, federally insured banks, has yet to propose its own version of a 'true lender' rule for those banks.
The rule will take effect after 60 days of publication in the Federal Register.
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