January 24, 2022

Volume XII, Number 24

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January 24, 2022

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January 21, 2022

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Never Ending True Lender Uncertainty

On June 24, 2021, the U.S. House of Representatives passed a resolution to overturn the Office of the Comptroller of the Currency’s (“OCC”) “true lender” regulation that had been finalized on October 30, 2020. This resolution revives the uncertainty regarding the enforceability of loan terms when a national bank or federal savings association assigns loans to third parties.   President Biden is expected to sign the resolution. 

This saga began in 2015 when the Second Circuit Court of Appeals held in Madden v. Midland Funding that a national bank’s assignee was not permitted to charge the same interest rates permitted for the bank.  Uncertainty ensued, which the OCC had attempted to resolve through two related regulations.  It first issued a “valid when made” regulation in June 2020 stating that interest on a loan that is permissible under federal law applicable to national banks and federal savings association “shall not be affected by the sale, assignment, or other transfer of the loan.”  In a second regulation in October 2020, the OCC answered the question of how to determine the “true lender” for a loan, and thus determine permissible rates of interest. This regulation provided that a national bank or federal savings association is the entity making any loan (i.e., the true lender) if, as of the date of its origination, the bank or association funded the loan or is named as the lender in the loan agreement.  If one bank is named as the lender but another bank funded the loan, then the bank named as the lender in the loan agreement would have been considered to have made the loan. 

Although the Congressional resolution overruled only the OCC’s true lender regulation, it also seems to render useless the valid when made regulation.  The valid when made regulation will apply only if a national bank or savings association is the true lender, and we are once again left without clear true lender standards.  Because of this uncertainty at the federal level,  we might see states step in to fill some of the void by outlining the circumstances in which a bank or savings association will be considered the true lender for state lender licensing and usury purposes. 

One state to have do so already is Colorado.  The Colorado Attorney General had alleged that certain non-bank parties were the true lenders, rather than the banks that originated the loans, because those non-banks held the predominant economic interest in the laws.  That meant that the interest rate authority applicable to the banks did not apply and so the non-banks were confined to  the more restrictive interest rate laws applicable to them.  The Colorado Attorney General ultimately entered into a settlement with the parties that set forth the conditions under which the banks could be treated as the true lenders, but also required the non-bank lenders to obtain lending licenses.  This settlement might serve as a model for legislation in other states, which would at least provide certainty to the industry.

Copyright 2022 K & L GatesNational Law Review, Volume XI, Number 187
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About this Author

Associate

Jeremy McLaughlin is an associate in the firm’s San Francisco office and a member of the Consumer Financial Service group. His practice focuses principally on regulatory compliance and government enforcement for Fintech and consumer financial products and services, with particular attention on emerging payments and compliance with state and federal consumer protection laws, state money transmitter licensing laws, and international remittances, as well as advising on privacy, data security, and PCI compliance. He represents and advises financial technology companies,...

415-882-8230
Partner

John ReVeal is a partner in the firm’s Washington, D.C. office and a member of the consumer financial services practice group. He advises banks and other financial services providers on consumer compliance and assists financial institutions in the review and development of Bank Secrecy Act and Anti-Money Laundering programs.

In addition, Mr. ReVeal advises financial institutions regarding bank and thrift powers, federal preemption, exportation of rates and charges, and financial institution licensing.

202-778-9055
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