Online lenders continue to be plagued by “true lender” legal issues, including lawsuits from state attorneys general and private litigants challenging the named lender in loans made through online lenders’ partnerships with federally regulated banks. A potential ready remedy, however, arguably exists in federal bank agency opinions that were issued decades ago. In February 1998, the U.S. Comptroller of the Currency issued Interpretative Letter 822 with the aim of bringing greater structure and predictability to interstate lending by national banks. The letter addressed the Riegle-Neal Interstate Banking Act, which Congress passed in 1994 to bring about interstate branch banking and which posited that a national bank might be “located” in more than one state and, thus, subject to the usury laws of multiple states. Prompted by the realization that it would be “nonsensical” for a national bank to attempt to engage in a nationwide lending business “without a reference point for determining appropriate state interest rate law,” the OCC adopted a simple, three-part test in Interpretative Letter 822 for conclusively determining where a national bank is “located” when it makes a loan. This same test was adopted by the FDIC in May 1998 in its General Counsel’s Opinion No. 11. Under the test, the activity of making a bank loan is considered to consist of just three “non-ministerial” subactivities (i.e., loan approval, disbursal of the proceeds, and communication of the decision to lend). If at least one of these activities took place in the bank’s home state, the bank may “export” its home state’s interest rate to borrowers located in other states.

Since 1998, when OCC Interpretative Letter 822 and FDIC Opinion No. 11 were issued, it has been well-settled that a federally regulated bank does not violate usury laws when it maintains a branch office in a foreign state and charges interest to the residents of that foreign state at the rates permitted under the bank’s home state laws. According to Letter 822, widespread congressional understanding supports the proposition that, “in the context of nationwide interstate branching, it is the office of the bank or branch making the loan that determines which State law applies.” (Emphasis in original.) To this end, Letter 822 provides several examples of “ministerial” activities that do not determine where the activity of lending takes place, including furnishing and assembling application materials, receiving and processing loan payments, and routinely applying an approved credit model. On the other hand, there are only three non-ministerial activities that dictate where a loan is made: (1) the decision to approve, which could involve the approval of a scoring model; (2) the communication of the approval decision; and (3) physical disbursal of the proceeds. In this regard, the OCC opined that, as long as any one of these functions takes place in the bank’s home state, the bank may choose to charge its home state’s interest rates “irrespective of the state of the residence of the borrower.”

If a federally regulated bank subcontracts the responsibilities for loan servicing and other ministerial activities to one or more third-party service providers, this subcontracting should have no effect on the bank’s legal ability to export its home state’s interest rate. Indeed, the Bank Service Company Act expressly authorizes banks to utilize third-party service providers. Yet, in those states where “true lender” lawsuits have been brought successfully, OCC Interpretative Letter 822 and FDIC General Counsel’s Opinion No. 11 did not even come into play. Rather, the legal authorities in those states proceeded under the assumption that a non-bank party can only accept so much of the economic and other responsibilities bound up with the making of a loan before that non-bank party should be considered the actual lender in place of the named bank lender. However, rather than alleging that the bank in such a relationship conspired with the non-bank to defraud the public with respect to the true identity of the lender, the existence of the bank in the mix is essentially ignored.

For example, in 2018, the state of Colorado succeeded in obtaining the dismissal of lawsuits filed by Cross River Bank and WebBank in connection with ongoing true lender litigation in that state. The cases were dismissed on the basis that, unlike their respective non-bank lending partners, neither bank was the subject of a lawsuit. The result of this approach to litigation is that loans that are patently lawful when viewed under the federal banking laws become unlawful if one ignores the existence of a loan program relationship between an insured bank and a non-bank party and treats the loans as having been made by a non-bank.

In drafting Letter 822, the OCC wanted to avoid having section 85 of the National Bank Act “interpreted so as to throw into confusion the complex system of modern interest banking.” In seeking to avoid interpreting section 85 (and its counterpart section 27 under the Federal Deposit Insurance Act), state authorities continue to create new and disparate legal tests for determining when and where a loan is made.

On its face, it should be simple matter for the OCC and/or the FDIC to assert that, as a matter of federal law, a bank is the only “true” lender whenever a federally regulated bank is the named lender in a loan made to a consumer borrower. To this end, if it were uniformly applied, the non-ministerial lending test established in Letter 822 should provide adequate safeguards against abuse by unscrupulous parties. For example, if the non-bank party to a lending relationship with an insured bank were to exert undue influence over lending decisions, that party could be deemed the true lender for all purposes involving the application of state usury laws. On the other hand, the performance of ministerial lending activities on the part of the non-bank, such as customer service or payment processing, should not cause the non-bank to be deemed the true lender. Unfortunately, unless and until the OCC or the FDIC takes a firm stance on this point, the “complex system of modern interest banking” will continue to marked by uncertainty and contradiction that benefits no one.