On July 20, 2020, the Office of the Comptroller of the Currency (OCC) issued its anticipated notice of proposed rulemaking on how to determine when a national bank or federal savings association (referred to collectively as a national bank) is the “true lender” in the context of a partnership between a national bank and a third party. Under the proposal, if a national bank either (1) is named as the lender in the loan agreement, or (2) funds the loan, then it is the national bank that makes the loan. This simple, bright-line test would replace a growing body of case law containing divergent standards and growing uncertainty in determining what legal framework applies to a loan in these partnerships. According to the OCC, the proposed rule, in conjunction with the OCC’s previously announced Madden-fix (The One-Two Punch to Madden), would provide certainty to enable national banks to “leverage their balance sheets to meet customers’ needs for affordable credit.”

Current federal law allows banks to create loan origination and other relationships with other marketplace participants to provide loans to borrowers. However, no federal law addresses which party in these third-party relationships makes the loan, which has required courts to determine who the true lender is when questions arise. The courts have taken different approaches in these cases relying on a variety of factors. The different standards and outcomes resulting from these cases has led to uncertainty on what legal framework applies to loans made under these programs.

In its proposed rulemaking, the OCC takes significant space to remind us that when a national bank is the true lender in these relationships, the loan is subject to a strict statutory, regulatory and supervisory framework that provides important consumer protections and safety and soundness standards, even if the national bank’s partner is the customer-facing entity. To name only a few applicable laws from the OCC’s list of examples, a loan made by a national bank is subject to Section 5 of the Federal Trade Commission Act, which provides that unfair or deceptive acts or practices in or affecting commerce are unlawful, the Dodd-Frank Wall Street Reform and Consumer Protection Act’s prohibition of unfair, deceptive, or abusive’ acts, and federal fair lending laws. The OCC also notes that as the supervisor of national banks, it is tasked with ensuring that national banks have prudent underwriting standards and loan documentation policies and procedures. The OCC believes that applicable law and regulatory oversight provide appropriate safeguards with respect to a national bank’s use of its lending power and are appropriate to consider in the context of a lending partnership.

Key Points:

• The marketplace lending industry will welcome this clarification because the true lender issue weighs heavily on companies that are partnering with banks to deliver consumer products nationally.
• The bright-line test eliminates the need for the “substantive analysis” that many courts have used to determine the true lender using the judge-made “predominant economic interest test.”
• The use of the disjunctive “or” in the bright-line test (named as lender or funds the loan) will raise some issues with table-funded mortgage transactions, since the documentation will list one party as the lender on the loan documentation, but the loan will be funded by a third party to which the loan is sold after the closing. Who would be deemed the lender in this type of transaction raises licensing and other issues.
• Consumer groups will strenuously oppose the proposed regulation and call it an endorsement of what they view as predatory lending practices. However, the OCC is right that there are a litany of protections with respect to national bank lending activities and that national banks face strict oversight and scrutiny from a regulatory standpoint.
• Finally, any final rule would be subject to the Congressional Oversight Act, which could come into play if there is a change in the makeup of the House and Senate after the election in November.

The OCC will accept comments on the proposed rule received on or before September 3, 2020.