On July 22, 2020, the Office of the Comptroller of Currency ("OCC") proposed a new rule in the federal register, concerning when a bank or savings association is a "true lender," when the loan is sold or assigned to different entities. The comment period for the OCC's proposed rule ended on September 3, 2020, with mixed results.
In its proposed rule, the OCC interpreted the National Bank Act, Federal Reserve Act, Home Owners' Loan Act and propounded a test to determine when a bank makes a loan and may be considered the true lender in a loan transaction. The OCC stated that "a bank makes a loan when, as of the date of origination, it (1) is named as lender in the loan agreement or (2) funds the loan." The OCC further considers a true lender to "[have] a predominant economic interest in the loan," as the original funder, even if it is not "the named lender in the loan agreement as of the date of origination." The OCC reasons that such an interpretation would provide regulatory clarity and certainty that would enable banks and their partners to lend a manner consistent with their business objectives. The OCC contends that identifying the true lender would enable the OCC to directly supervise lending activities of banking entities and clear up any confusion as to which legal framework applies when a loan is originated as part of a lending relationship between a bank and a third party.
The proposed rule was met with a mix of comments. For instance, the New York Department of Financial Services (NYDFS), an ardent critic of the OCC's recent attempts at streamlining the application of national banking regulations, submitted a critical comment letter stating that the proposed rule would "gut state usury laws and state licensing requirements with respect to unregulated lenders." Similarly, 24 state attorneys general, including from New York and California, submitted a joint letter urging that the OCC rescind its proposed rule as it would only perpetuate "rent-a-bank" schemes where non-bank lenders use national banks as the delivery vehicle to charge interest at rates the non-banks could not charge on their own. Supporters of the proposed rule contend that such a bright-line rule would clarify when a bank is a true lender in a loan at the time of origination, eliminating confusion and promoting uniformity in banking operations. Supporters also believe the rule would encourage banks to obtain assistance from fintech or other non-bank entities to offer bank loans to a wider array of consumers or small businesses.
Ultimately, the reaction to the OCC's proposed rule is a preview to the litigation that will likely commence if this rule becomes, much like the litigation surrounding the OCC's similar clarification of the "valid-when-made" principle. For previous coverage about the litigation surrounding the "valid-when-made" principle, click here and here.
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