FinReg + Policy Watch
October 28, 2020

OCC Finalizes “True Lender” Rule

On October 27, the OCC issued a final rule establishing that a national bank or federal savings association (bank) is the “true lender” of a loan if, as of the date of origination, the bank either is the named lender in the loan agreement or funds the loan. The final rule was adopted as proposed except for an additional clarification that, where one bank is named as the lender in the loan agreement and another bank funds the loan, the bank named as the lender in the loan agreement makes the loan.

As previously reported, state agencies and plaintiffs’ counsel have challenged some bank-nonbank lending relationships, including Fintech-bank lending partnerships on “true lender” grounds arguing that, under certain circumstances, the nonbank party that purchases from the bank loans or interests in the loans generated by the arrangement should itself be licensed as a lender and, as a result, should only be able to receive interest permitted to a licensee if licensed (e.g., so-called “rent-a-charter” arrangements). In adopting the final rule, the OCC stated that, “rent-a-charter schemes have no place in the federal financial system,” and expressed a belief that the rule will “help solve the problem” by providing greater clarity while emphasizing that any loan made by a bank is subject to a “robust” supervisory framework (as described in the adopting release).

The true lender doctrine can result in substantial expenses and uncertainty over where a bank sells loans it originates to another party, as true lender determinations involve multifaceted, facts-and-circumstances analyses. The rule dramatically simplifies the true lender analysis and therefore should help reduce Fintech-bank lending partnerships’ susceptibility to enforcement actions or private litigation on true lender grounds and could similarly help such partnerships thrive.

In public comments, critics of the rule asserted that the OCC lacks authority to issue the rule and also raised procedural objections, so the rule may be subject to legal challenge. Accordingly, until there is judicial precedent supporting the OCC’s position, Fintech companies may be well-advised to continue taking steps to address true lender concerns, even if they are originating loans through a bank.

The final rule will become effective 60 days after its publication in the Federal Register.

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