OCC Issues Final “True Lender” Rule

As Lender Law Watch previously reported, in July 2020, to resolve the legal uncertainty discouraging many banks and companies from entering into partnerships to offer loans to consumers, the OCC issued its proposed true lender rule to address the question of which entity makes a loan when the “loan is originated as part of a lending partnership involving a bank and a third party.”  On October 27, 2020, the Office of the Comptroller of the Currency (OCC) issued its final True Lender Rule (Final Rule).

The OCC’s Final Rule establishes a test for determining when a bank makes a loan and therefore is the “true lender” in the lending relationship.  A bank makes a loan when, as of the date of origination, (1) the bank is named as the lender to the loan agreement or (2) the bank funds the loan. In situations where more than one bank could be the true lender­­­—for instance, when one bank is the named “lender” on the loan agreement and another bank funds the loan—the Final Rule provides that the true lender is the bank that is named as the lender in the loan agreement.  The OCC notes that the Final Rule applies only to national banks and Federal savings associations.

Certain commenters have noted that this rule may lead to “inappropriate ‘rent-a-charter’ lending schemes,” permitting certain lenders to evade state interest rate caps and state consumer protection laws by simply putting the national bank’s name on the loan agreement and “allow[ing] the bank to disclaim any compliance responsibility for the loans.”  The OCC notes this concern stating that this Final Rule “holds banks accountable for all loans they make, including those made in the context of marketplace lending partnerships or other loan sale arrangements.”  Further, Acting Comptroller Brian Brooks recently said in a statement that the Final Rule “clarifies that banks retain compliance obligations for loans they originate.”

This Final Rule will “operate together” with the OCC’s rule affirming the “Valid When Made” Doctrine—the doctrine that a transaction valid when made remains valid upon transfer—such that “[w]hen a bank makes a loan pursuant to the test established in [the Final Rule], the bank may subsequently sell, assign, or otherwise transfer the loan without affecting the permissible interest term, which is determined by reference to state law.”

The OCC’s Final Rule will have a significant impact on the financial industry as it will likely encourage banks to continue entering into partnerships, which ultimately expands access to credit.