OCC Finalizes its “True Lender” Test: Paving the Way for Bank & Non-Bank Partnerships

Nelson Mullins Riley & Scarborough LLP

The Office of the Comptroller of the Currency (“OCC”) issued its long-anticipated final rule on Oct. 27, to establish a “simple, bright-line test” to determine when a national bank or federal savings association has made a loan and, therefore, is the “true lender” in a lending relationship with a third party. Under this “true lender” test, a bank or savings association makes a loan if, as of the date of origination, the bank or savings association:

  1. is named as the lender in the loan agreement; or
  2. funds the loan.

In issuing this rule, the OCC acknowledged the critical role that lending partnerships between banks and third parties play in our financial system. Oftentimes, these partnerships allow banks to leverage technology developed by innovative third parties (e.g., FinTechs) that helps to reach a wider array of customers, resulting in expanded access to credit. However, with these partnerships, there is often uncertainty about how to determine which entity is making the loan and, therefore, the laws that apply to these loans. Under the guise of a “true lender” challenge, state attorneys general and other state actors asserted that the bank that originated the loan is not the “true lender” and instead the non-licensed partner who purchases the loan should be treated as the lender-in-fact. This litigation resulted in courts issuing divergent “true lender” tests. For this reason, many banks were discouraged from entering into lending partnerships with third parties and FinTechs, which, in turn, limited competition in the marketplace, restricted access to affordable credit, and chilled the innovation resulting from these relationships.

While this area of regulation continues to evolve rapidly, this week’s final rule looks to resolve some uncertainty and enable banks to exercise the lending authority granted to them under federal law. With this bright-line test, we expect that the number of bank and non-bank partnerships will increase as stakeholders will obtain additional legal certainty necessary to partner confidently with other market participants and meet the credit needs of their customers. 

While this is viewed as a positive development within a financial services industry looking for guidance on the subject, it is unclear if state regulators will take this final rule as the last word on bank-model partnerships. Risk may continue to exist for non-bank partners and FinTechs operating under bank-model partnerships; though this final rule provides clear guidance as to OCC’s role in overseeing national banks entering into such partnerships, state regulators may disagree with this position and continue to file legal challenges to such models or seek to overturn the regulatory rulemaking in state enforcement actions against the non-bank partners and FinTechs. At the very least, the rule should serve as strong evidence of the position of the prudential bank regulators that should be considered by state courts examining “true lender” lawsuits. 

The final rule will take effect 60 days after publication in the Federal Register.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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