OCC clarifies who is 'true lender' in bank-nonbank partnerships

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WASHINGTON — The Office of the Comptroller of the Currency finalized its “true lender” rule Tuesday, capping the agency’s effort to address uncertainty about bank partnerships with nonbank financial institutions.

The final rule, which is largely unchanged from its proposed version in July, applies a simple test to determine when a bank is the true lender in the context of a nonbank partnership.

According to the OCC, a national bank is the true lender if, at the time of a loan’s origination, it is named as the lender in a loan agreement or if the bank funds the loan. That means the national bank is responsible for ensuring the loan complies with consumer protection laws, but it also means that state interest rate caps do not apply.

Yet the OCC tweaked the proposal by saying that when one bank is named the lender in an agreement and another funds the loan, the former is considered the true lender.

In a statement, acting Comptroller Brian Brooks said the final rule “provides regulatory certainty for the industry and clarifies that banks retain compliance obligations for loans they originate."

According to the OCC, a national bank is the true lender if, at the time of a loan’s origination, it is named as the lender in a loan agreement or if the bank funds the loan.
According to the OCC, a national bank is the true lender if, at the time of a loan’s origination, it is named as the lender in a loan agreement or if the bank funds the loan.

"It supports healthy markets, promotes access to credit, and protects against harmful ‘rent-a-bank’ arrangements,” he said.

But consumer advocates and some lawmakers immediately lashed out at the agency, saying the regulation enables unregulated nonbanks to use the cover of a bank partner to avoid consumer protections.

“Today’s rule takes us back to the time 20 years ago, when payday lenders were evading state interest rate caps merely by putting a bank’s name on the paperwork,” said Lauren Saunders, associate director of the National Consumer Law Center.

The OCC's rule comes as the agency and others have taken steps to address uncertainty about the effects of state interest rate caps on deals between banks and nonbank partners that cross state lines.

Tuesday’s rule is the latest in a series that bank regulators have drafted and finalized over the past year to help banks maneuver around a controversial 2015 court decision, Madden v. Midland Funding, that limited banks’ ability to sell off loans. In May, a separate OCC rule confirmed that a loan's interest rate can remain legally intact even after the loan is acquired by a purchaser in a state with a lower rate cap.

In a press release, the National Consumer Law Center suggested the OCC’s true lender rule would likely face litigation. The agency has already faced a legal challenge over its so-called valid-when-made rule.

“The OCC has already been sued by state attorneys general for its first attempt to protect predatory rent-a-bank lenders, and I expect the agency will be sued once again over this rule, which far exceeds the OCC’s authority to take away states’ power to protect people from predatory lending,” Saunders said.

Other consumer advocates blasted the OCC for finalizing the rule amid the COVID-19 pandemic.

“We are in the midst of an unprecedented public health pandemic and a severe economic crisis,” said Lisa Stifler, state policy director of the Center for Responsible Lending. “It’s difficult to imagine a more inappropriate time to disrupt longstanding safeguards in place since the founding of this country that have played a fundamental role in protecting consumers from abusive financial practices."

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OCC Regulatory relief Nonbank Midland Funding v Madden Fintech
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