Locke Lord QuickStudy: OCC Issues Final Rule Addressing the “True Lender” Problem

On October 30, 2020, the Office of the Comptroller of the Currency (the “OCC”) published its ‎final rule (the “Rule”) that establishes when a national bank or federal savings association makes a ‎loan and is the “true lender,” including when a bank is involved with a third party lender.^‎1 The Rule ‎will be effective December 29, 2020.‎

Background

On June 2, 2020, the OCC published its final rule clarifying that an assignee of a national bank has ‎the right to collect interest at the same rate as the national bank on loans made by the national ‎bank.‎² In doing so, the OCC codified the common law doctrine of “valid when made,” which states ‎that a loan that was valid when made will not be rendered usurious by a subsequent transfer. The ‎OCC adopted the “valid when made” doctrine to resolve the legal uncertainty created by Madden v. ‎Midland Funding, LLC, a decision in which the U.S. Court of Appeals for the Second Circuit held ‎that a debt collector assignee of a national bank could not charge the higher interest rate charged by ‎the bank.‎³ On July 22, 2020, the Federal Deposit Insurance Corporation (“FDIC”) published its ‎final rule extending the benefits of the “valid when made” doctrine to state-chartered banks.‎⁴ Our ‎analysis of the OCC rule is available here ‎and our analysis of the FDIC rule is available here.‎ Neither rule, however, addressed the question of whether a bank is the “true lender” in a ‎transaction where the loan is assigned to the assignee soon after it is made pursuant to an agreement ‎between the bank and the assignee. The Rule finally answers that question, though its scope is ‎limited to national banks and federal savings associations.‎

The Rule

Under the Rule, a bank makes a loan if, as of the date of origination, it (1) is named as a lender in ‎the loan agreement or (2) funds the loan.‎⁵ Where one bank is named as the lender in the loan ‎agreement and a different bank funds the loan, the Rule provides that the bank that is named as the ‎lender in the loan agreement is the true lender of that loan.⁶ In response to comments made on the ‎proposed rule, the release also makes clear that when a bank lends money under a warehouse line ‎of credit, the bank is not “funding” the loans made by the warehouse line borrower. Similarly, a ‎bank that purchases retail installment contracts from an auto dealer is not thereby “funding” the ‎loans it purchases.‎

Critics of the proposed rule argued that it would facilitate “rent-a-charter” schemes in which banks ‎receive fees to “rent” their charter and unique legal status to third parties, thereby enabling the third ‎parties to evade state and local consumer protection laws. The banks can then disclaim ‎responsibility for the loans, leaving consumers in debt to predatory lenders. In its release ‎accompanying the Rule, the OCC squarely rejects this argument, reasoning that the Rule actually ‎thwarts these schemes by implementing a clear and simple test for determining when a bank makes ‎a loan. Additionally, the OCC notes that such schemes have no place in the federal financial ‎system, and reaffirms its commitment to hold banks accountable for the underwriting standards of ‎the loans they make.‎

Lingering Uncertainty for State-Chartered Banks

As noted above, the Rule only applies to national banks and federal savings associations. ‎Accordingly, state-chartered banks may reasonably expect “true lender” attacks on specific types ‎of loan transactions to continue. Courts that have addressed the “true lender” issue have employed balancing tests that consider a variety of factors. Furthermore, courts do not always consider the ‎same factors or even give the same factors the same weight, increasing the likelihood of divergent ‎outcomes. Although the FDIC may follow the lead of the OCC in order to promote uniformity, it ‎has yet to propose a similar rule for state-chartered banks. We will continue to monitor the FDIC’s ‎rulemaking process for further developments on this front.‎

For more information on the matters discussed in this Locke Lord QuickStudy, please contact the ‎authors.‎

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_{1 National Banks and Federal Savings Associations as Lenders, 85 Fed. Reg. 68,742 (Oct. 30, 2020).‎
2 Permissible Interest on Loans That Are Sold, Assigned, or Otherwise Transferred, 85 Fed. Reg. 33,530 (Jun. 2, ‎‎2020).‎
3 Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015).‎
4 Federal Interest Rate Authority, 85 Fed. Reg. 44,146 (Jul. 22, 2020).‎
5 12 C.F.R. § 7.1031(b). ‎
6 Id. § 7.1031(c).‎}