On July 20, 2020, the Office of the Comptroller of the Currency (“OCC”) issued a notice of proposed rulemaking that would determine the “true lender” of a national bank or federal savings association loan in the context of a partnership between a bank and a third party.  The proposed rule states that a bank is a true lender of a loan “if, as of the date of origination, it is named as the lender in the loan agreement or funds the loan” and would apply to all national banks and federal savings associations.  Most recently, the OCC addressed the related “valid when made” doctrine and held that interest rates established on bank-originated loans remain valid even after the loan is transferred to a non-bank partner.  This final rule, however, did not address the true lender question, and this week’s proposed rule does just that.     

The OCC proposed this rule in response to the “increasing uncertainty” surrounding the legal principles that apply to the loans made in the course of bank and third party relationships.  Courts are not unified in their analysis and have looked to both “the form of the transaction” and a battery of fact-intensive tests to determine the true lender of a loan.  While federal rulemaking addresses many relationships between banks and third parties such as making payments and taking deposits, there is not much guidance on these relationships as it relates to lending.  See e.g., 12 CFR 5.20(e).  Per the OCC’s proposed rule, this uncertainty “may discourage banks and third parties from entering into relationships, limit competition, and chill the innovation that results from these partnerships.”  Taken together, these unintended consequences would restrict consumer access to affordable and available credit. 

In line with the OCC’s commitment to not treading on or abridging federal bank powers, the rule “would enable banks to fully exercise the lending authority granted to them under Federal law and allow stakeholders to reliably and consistently identify key aspects of the legal framework applicable to a loan.”  However, the proposed rule would not reduce a bank’s responsibility to ensure that its relationship and subsequent lending activities with its third-party lender comport with safety and soundness requirements that banks must already follow.  The OCC further instructs banks to consider, among others, the following principles and factors as part of their supervision of lending relationships with third parties:  (1) whether the underwriting standards for lending activities as part of the third-party relationship mirror those that would be used by the bank in the absence of a third-party relationship; (2) whether the bank’s loan terms and lending practices are appropriate for borrowers; (3) whether the bank’s return on the loans are reasonably calculated against the bank’s risk and lending costs; and (4) whether the loan disclosures provided by the bank to the borrower apprise the borrower of risks and terms associated with the loan.    

The proposal, if approved in this form, would operate in conjunction with the OCC’s recent Madden fix to provide clarity for OCC-regulated financial institutions and their marketplace lending partners.  Under the proposed rule, once the true lender of the loan has been determined, the allowable rate of interest would then be applied as part of the loan terms.  In tandem with the OCC’s Madden fix, the loan can then be subsequently sold, assigned, or otherwise transferred without affecting the interest term.