OCC Releases Final True Lender Rule

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On October 27, 2020, the OCC released its final True Lender Rule. As discussed earlier on this blog, the OCC’s rule is designed to clarify 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. The true lender doctrine has caused uncertainty for banks, fintech companies, and other entities involved in the bank partnership model. The OCC’s final rule, which applies to national banks and federal savings associations, will provide some much-needed certainty in the space, and is a welcome first step in what will likely be a longer process of regulatory agencies accounting for modern lending practices.

The final rule tracks the OCC’s proposed rule, with one small clarification. After publication of the proposed rule, some commenters noted that the rule, as written, could cause problems in instances where more than one bank could be considered the “true lender.” For instance, if at origination one bank was the lender on the loan agreement and another bank funded the loan, under the language of the OCC’s proposed rule, both institutions could be considered the “true lender.” The OCC responded to this issue by drafting a new provision stating that if, on the date of origination, one bank is named as the lender in the loan agreement and another bank funds the loan, the bank named in the loan agreement is the “true lender.” Under the OCC’s reasoning, this approach allows customers to more easily identify the party responsible for the loan through reference to the loan documents themselves. Thus, under the rule, a national bank or federal savings association is considered the “true lender,” as opposed to its non-bank partner, if it is either (1) named in the loan agreement or (2) funds the loan, and if two different banks are involved in the credit transaction, the tie goes to the bank named on the loan agreement.

The final rule’s supplementary information also addresses commenters’ other concerns. For instance, several commenters expressed concern regarding the breadth of the rule, and asked that the rule be amended to clarify that the funding prong not include certain lending and financing arrangements, such as warehouse lenders, indirect auto lenders through bank purchases of retail installment contracts, loan syndication, or other structured finance. The OCC ultimately did not amend the final rule to make these clarifications, but it did note that the commenters were “correct that the funding prong of the proposed rule generally does not include these types of arrangements: they do not involve a bank funding a loan at the time of origination.”

Other commenters expressed concern that the final rule not displace other regulatory regimes – in particular, certain consumer protection regulations. For instance, one commenter suggested that the final rule would alter how account information in bank partnership arrangements is reported under the Fair Credit Reporting Act. Addressing these concerns, the OCC noted that the final rule “does not affect the application of any federal consumer financial laws,” including TILA, Regulation Z, Regulation X, RESPA, HMDA, the ECOA, or the FCRA.

While the proposed rule, which goes into effect 60 days after it is published in the Federal Register, is a welcome addition, we are certain it will be met with litigation by its opponents. Indeed, in September, the attorneys general of several states submitted a comment letter to the Acting Comptroller of the Currency Brian Brooks asking that the proposed rule be rescinded. Moreover, several states have sued the FDIC and the OCC over rules designed to provide a “Madden Fix,” a related problem facing fintech companies and entities involved in bank partnership arrangements. We anticipate litigation from state agencies challenging the OCC’s true lender rule and will keep our ear to the ground for any new 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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