OCC Proposal Would Bring Certainty to the Identity of the “True Lender”
Markets like certainty. On July 20, 2020, the Office of the Comptroller of the Currency (the “OCC”) proposed a new rule for national banks and federal savings associations that would solve the “true lender” question and help bring certainty to financial markets. Under the proposed rule, a bank will be deemed the “true lender” in a bank partnership model if it is either (i) the named lender in the underlying loan agreement or (ii) the party that funds the loan.
As of late, state regulatory agencies across the U.S. have brought “true lender” actions seeking to invalidate various “bank partnership models” used by both banks and non-bank lenders to generate consumer and small dollar business loans. In reviewing these challenges, courts have struggled with whether the “true lender” in these partnerships is the bank or the non-bank lender, with some courts looking at multiple factors in reaching a decision. The distinction is important inasmuch as it determines whether the National Bank Act applies, or whether the loan is to be governed entirely by state law. The proposed rule is applicable only to national banks and federal savings associations and would resolve the question by establishing clear rules based upon whether the bank is (i) the named lender or (ii) the party funding the loan.
Since the rule is being proposed by the OCC, it is of course not applicable to state-chartered banks and, consequently, fails to address the uncertainty in state-chartered bank partnership models.
A copy of the proposed rule can be found by clicking here.