OCC Proposes Clarification to True Lender Doctrine

Bradley Arant Boult Cummings LLP

Earlier this week, the OCC released a proposed rule designed to address the “true lender” doctrine, a legal test utilized by courts and regulators to determine whether a bank or its non-bank partner is the actual lender in a credit transaction. This doctrine has led to uncertainty in the fintech and bank-partnership spaces, in large measure because of the lack of uniformity between jurisdictions and the subjective nature of the tests used to determine the true lender. As currently written, the proposed rule substantially simplifies the test: A national bank — rather than its non-bank partner — is the lender if either (1) it is named in the loan agreement or (2) funds the loan. The OCC’s proposed rule, which comes on the heels of the OCC and FDIC’s recent Madden fix rules, represents a continuation of the agency’s push to issue rules that encourage innovation in ways that increase access to credit.

True lender doctrine issues arise when banks and non-bank entities enter partnerships to offer loan products. Under the typical iteration of this model, the non-bank partner may market loans, identify potential borrowers, and collect applications while the bank will underwrite and originate the loan. The bank will then assign a majority stake in the loan to either the bank partner or a third party. There are substantial benefits to this model, including the ability to reach a more-diverse, often unbanked clientele, the ability to avoid some states’ licensing requirements, and the ability to benefit from the uniformity of interest rate preemption under the National Banking Act (NBA).

Banks’ ability to import their home-state usury law through NBA interest rate exportation has drawn scrutiny from multiple quarters, including Congress. Moreover, regulators and private litigants in several states have filed complaints in their respective state courts arguing that a bank’s non-bank partner violated state usury laws. For instance, in Meade v. Marlette Funding, LLC, the administrator of Colorado’s Uniform Consumer Credit Code (UCCC) alleged that Marlette Funding used its relationship with a New Jersey chartered bank to skirt Colorado usury laws. Specifically, the administrator argued that Marlette, rather than the bank, was the “true lender” because, among other things, it chose the loan recipients, raised capital to make the loans, and was required to indemnify its bank partner. More problematically still, there is a growing body of diverse, and sometimes inconsistent case law regarding the true lender doctrine. According to the OCC’s Notice of Proposed Rulemaking (NPRM), the current standards “increase the subjectivity in determining who is the true lender and undermine banks’ ability to partner with third parties to lend across jurisdictions on a nationwide basis.”

Against this backdrop, the OCC’s proposed rule is designed to provide a uniform standard to determine whether a bank or the bank’s partner is the “true lender” in a particular credit transaction. Specifically, the OCC proposes two separate tests to determine the identity of the true lender. First, if the bank is named on the loan agreement as of the date of the loan’s origination, then the bank is the true lender because “the bank has elected to subject itself to the panoply of applicable Federal laws and regulations … governing lending by banks.” Second, a bank that funds the loan as of the date of origination is also deemed the true lender because “it has a predominant economic interest in the loan …” Moreover, under the proposed rule, the determination of the true lender does not change even if the bank transfers the loan.

In addition to increased certainty regarding the identity of the true lender, the proposed rule may also provide banks with regulatory clarity. For example, if the bank is the true lender, then the bank is responsible for ensuring that loans are made “in a safe and sound manner and in accordance with applicable laws and regulations, even if the loan is made in the context of a third party partnership and even if the bank’s partner is the customer-facing entity.”

Taken together, the OCC’s proposed rule is a positive step that should encourage innovation in the lending space, and increase access to credit and uniformity across different markets. On the other hand, the proposed rule would apply only to nationally chartered banks governed by the OCC, so there is still work to be done. The OCC is accepting comments on the proposed rule until September 3, 2020. We will continue to monitor this rulemaking for any developments.

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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