OCC Finalizes “True Lender” Rule

Goodwin

REGULATORY DEVELOPMENTS

OCC Finalizes “True Lender” Rule

On October 27, the OCC issued a final rule establishing that a national bank or federal savings association (bank) is the “true lender” of a loan if, as of the date of origination, the bank either is the named lender in the loan agreement or funds the loan. The final rule was adopted as proposed except for an additional clarification that, where one bank is named as the lender in the loan agreement and another bank funds the loan, the bank named as the lender in the loan agreement makes the loan.

As previously reported, state agencies and plaintiffs’ counsel have challenged some bank-nonbank lending relationships, including Fintech-bank lending partnerships on “true lender” grounds arguing that, under certain circumstances, the nonbank party that purchases from the bank loans or interests in the loans generated by the arrangement should itself be licensed as a lender and, as a result, should only be able to receive interest permitted to a licensee if licensed (e.g., so-called “rent-a-charter” arrangements). In adopting the final rule, the OCC stated that, “rent-a-charter schemes have no place in the federal financial system,” and expressed a belief that the rule will “help solve the problem” by providing greater clarity while emphasizing that any loan made by a bank is subject to a “robust” supervisory framework (as described in the adopting release).

The true lender doctrine can result in substantial expenses and uncertainty over where a bank sells loans it originates to another party, as true lender determinations involve multifaceted, facts-and-circumstances analyses. The rule dramatically simplifies the true lender analysis and therefore should help reduce Fintech-bank lending partnerships’ susceptibility to enforcement actions or private litigation on true lender grounds and could similarly help such partnerships thrive.

In public comments, critics of the rule asserted that the OCC lacks authority to issue the rule and also raised procedural objections, so the rule may be subject to legal challenge. Accordingly, until there is judicial precedent supporting the OCC’s position, Fintech companies may be well-advised to continue taking steps to address true lender concerns, even if they are originating loans through a bank.

The final rule will become effective 60 days after its publication in the Federal Register.

SEC and CFTC Hold Historic Joint Meeting to Amend the Security Futures Margin Rules

On October 22, the SEC and CFTC held their first-ever joint open meeting to vote on a final rule. Never before in the 45-year history of the CFTC has the CFTC formally voted together with the SEC to adopt a joint rule. The joint final rule adopted by the CFTC and SEC lowers the margin requirements for an unhedged security futures position from 20% to 15% and makes certain technical changes to better align the minimum initial and variation margin required on security futures with other similar financial products. In addition to adopting the joint final rule, the CFTC and SEC jointly voted to publish a request for comment on all aspects of portfolio margining requirements for uncleared swaps, non-cleared security-based swaps and related positions—including on the merits, benefits and risks of portfolio margining these types of positions, and on any regulatory, legal and operational issues associated with portfolio margin. As noted by CFTC Commissioner Heath Tarbert, “Portfolio margining is of central importance to market participants who are dually-registered with the SEC and the CFTC and have customers who hold positions in separate accounts without the ability to cross-margin the positions.” The CFTC and SEC’s joint amendments to the margin rules for security futures and similar products are intended to jumpstart the market in the U.S. by making regulation more efficient.

FinCEN and Federal Reserve File Joint Proposed Rule to Amend Recordkeeping and Travel Rule Regulations under the Bank Secrecy Act

On October 23, FinCEN and the Federal Reserve filed a joint proposed rule to amend the recordkeeping and travel rule regulations under the Bank Secrecy Act (BSA). Currently, financial institutions must collect, retain and transmit certain information related to fund transfers and transmittals of funds over $3,000. Under the proposed rule, the threshold for funds that begin or end outside the U.S. would be reduced from $3,000 to $250, while domestic transactions would remain unchanged at $3,000. The amendments would also clarify the definition of “money” to ensure that the rules apply to domestic and cross-border transactions involving convertible virtual currency, such as cryptocurrency, which either has an equivalent value as currency or acts as a substitute for currency, but does not have legal tender status. Finally, the rule would clarify that the recordkeeping and travel rule regulations apply to domestic and cross-border transactions involving digital assets that have legal tender status. The rule is expected to be published in the Federal Register on October 27 and comments may be submitted for 30 days following the date of publication.

CFPB Releases Advance Notice of Proposed Rulemaking on Consumer Access to Financial Records

On October 22, the CFPB issued an advance notice of proposed rulemaking (ANPR), requesting comments on how the CFPB should develop regulations to facilitate consumers’ rights under Section 1033 of the Dodd-Frank Act to access financial records and data accumulated by providers of financial products and services. The CFPB also seeks comment on the costs and benefits of consumer data access, competitive incentives, standard-setting, access scope, consumer control and privacy, and data security and accuracy. Comments are due within 90 days after the ANPR’s publication in the Federal Register.

FDIC Publishes Resource Guide to Promote Investment Partnerships with FDIC-Insured MDIs and CDFI Banks

On October 16, the FDIC published a new resource guide, “Investing in the Future of Mission-Driven Banks,” to promote private and philanthropic investment partnerships with FDIC-insured Minority Depository Institutions (MDIs) and Community Development Financial Institution banks (CDFI banks). FDIC-insured MDIs and CDFI banks provide banking products and services to small businesses and individuals in minority and lower income communities that have traditionally lacked access to safe and affordable credit. Modest investments at CDFI banks and MDIs can have an enormous impact on their operations and the communities they serve. The resource guide is FDIC’s latest effort to build supportive investment partnerships between CDFI banks and MDIs and other financial institutions and private companies. The FDIC has also created a MDI and CDFI Bank locator to facilitate in these efforts.

OCC Revises Handbook on Concentrations of Credit: Revised Comptroller’s Handbook Booklet and Rescissions

On October 26, the OCC issued a revised “Concentrations of Credit” booklet of the Comptroller’s Handbook, which is prepared for use by OCC examiners in connection with the examination and supervision of national banks, federal savings associations, and federal branches and agencies of foreign banking organizations (collectively, banks). Among other things, the revised booklet (1) changes the supervisory calculation for credit concentration ratios for banks that have implemented the current expected credit loss (CECL) transition rule to avoid double counting the allowance for credit losses in the denominator, and (2) replaces the term “criticized” with “special mention” for consistency with Banking Bulletin (BB) 1993-35, “Interagency Definition of Special Mention Assets.”

Temporary Policy Allowing Purchase of Qualified Loans in Forbearance Extended

On October 21, the Federal Housing Finance Agency (FHFA) announced the extension of its current temporary policy, allowing for the purchase of certain single-family mortgages in forbearance that meet specific eligibility criteria as set by Fannie Mae and Freddie Mac (Forbearance Purchase Policy). In April, the FHFA adopted the Forbearance Purchase Policy due to increasing instances of borrowers seeking payment forbearance after closing on their single-family loan, but before their lender could deliver the mortgage loan to Fannie Mae and Freddie Mac. Prior to the adoption of this policy, mortgage loans in either forbearance or delinquency were ineligible for delivery to Fannie Mae and Freddie Mac. The Forbearance Purchase Policy has been extended for loans originated through November 30, 2020.

ISDA Publishes the IBOR Fallbacks Supplement and IBOR Fallbacks Protocol

On October 23, the International Swaps and Derivatives Association (ISDA) launched the IBOR Fallbacks Supplement (the Supplement) and IBOR Fallbacks Protocol (the Protocol). The Supplement will amend ISDA’s 2006 Definitions for swaps and other interest rate derivatives to incorporate robust fallbacks for derivatives linked to an interbank offered rate (IBOR), including the most significant IBOR, the London interbank offered rate (LIBOR). The 2006 Definitions govern confirmations for swaps and other derivative transactions that use LIBOR as the reference rate. The Protocol will enable market participants to incorporate the amendments to the 2006 Definitions, including the reference rate fallbacks, into their swap documentation with counterparties that also adhere to the Protocol. The Protocol is open for adherence and will become effective on the same date as the Supplement: January 25, 2021. The fallbacks for a particular currency or IBOR (for example, fallbacks to Secured Overnight Financing Rate (SOFR) for transactions that use USD-BBA-LIBOR) will apply following a permanent cessation of the IBOR in that currency. For derivatives that reference LIBOR, the fallbacks in the relevant currency would also apply following a determination by the UK Financial Conduct Authority (FCA) that LIBOR in that currency is no longer representative of its underlying market. Market participants that have not already begun to amend their loan and swap documentation should confirm that their loan and other financing agreements have the appropriate fallbacks to SOFR and should adhere to the Protocol as soon as possible, but in no event later than December 2021 when the FCA will no longer require LIBOR to be published.

SEC Amends Requirements for Shareholder Proposals

The SEC has amended its rules governing the procedural requirements for submission and resubmission of shareholder proposals to be included in a company’s proxy statement under Rule 14a-8. Read the client alert for a summary of the impacts of the amended rule on the shareholder proposal process.

The amended rule will apply to proposals submitted for an annual or special meeting to be held on or after January 1, 2022. As a result, the amended rule will not apply to annual or special meetings held during 2021. The effective date of the amendments, which will be 60 days after publication in the Federal Register, will be relevant only for transitional relief for certain shareholders with respect to the new tiered ownership requirements.

CFPB Issues Assessment of Rule Requiring Consolidation of Mortgage Disclosures

On October 1, the CFPB released its rule assessment for a final rule relating to mortgage disclosures. Known as the TRID Rule, which was issued in November 2013 and went into effect in October 2015, the final rule implemented requirements under the Consumer Financial Protection Act (CFPA) to integrate various mortgage loan disclosures under the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act of 1974. The CFPB assessed the effectiveness of the rule for consumer understanding as well as the costs to industry participants, which showed generally positive, but occasionally mixed, results. Read the LenderLaw Watch blog to learn more about the CFPB’s assessment and its findings.

Bipartisan FDCPA Servicemembers Act Passes Through House

The U.S. House of Representatives unanimously passed a bipartisan bill, H.R. 5003 — also referred to as the Fair Debt Collection Practices for Servicemembers Act — aimed to enhance protections for servicemembers against debt collector harassment. The bill is now being reviewed by the Senate and its Committee on Banking, Housing and Urban Affairs. Read the LenderLaw Watch blog to learn about what this legislation would do to protect servicemembers.

LITIGATION AND ENFORCEMENT

NJ Attorney General Sues National Student Loan Servicer for Deceptive Practices

On October 20, New Jersey Attorney General Gurbir S. Grewal and the New Jersey Division of Consumer Affairs announced that they had filed suit in New Jersey state court against a national student loan servicer for alleged unconscionable commercial practices and deception and misrepresentations made to thousands of New Jersey consumers, in violation of the New Jersey Consumer Fraud Act, N.J.S.A. 56:8-2. Read the Enforcement Watch blog to learn more about the complaint.

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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