Consumer Finance Insights
January 12, 2021

State Attorneys General Challenge the OCC’s “True Lender” Rule

As LenderLaw Watch previously reported, the Office of the Comptroller of the Currency (OCC) issued its final rule on the True Lender doctrine in October 2020, addressing ambiguity in federal law and establishing that a national bank is the “true lender” of 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.  This final “True Lender” rule, otherwise known as the Madden fix, encourages lending partnerships between banks and non-banks, including FinTechs.  The rule went into effect in December 2020.

As anticipated, shortly after the rule went into effect, challenges to the “True Lender” rule arose.  On January 5, 2021, Attorneys General from seven states – New York, California, Colorado, Massachusetts, Minnesota, New Jersey, and North Carolina – and the District of Columbia filed suit against the OCC in the U.S. District Court for the Southern District of New York, challenging the rule.

In People of the State of New York, et al. v. The OCC, the States contend that the OCC’s “True Lender” rule improperly encourages predatory lending by “halt[ing] the ability of the States” to deter predatory lending practices with state usury and usury-evasion laws.

Further, in claiming that the “True Lender” rule violates the Administrative Procedures Act, the States argue that:

  • The plain language of the statutes the OCC relied upon in issuing the “True Lender” rule – the National Banking Act, the Federal Reserve Act, and the Home Owners’ Loan Act – does not permit the OCC to preempt state laws.
  • The “True Lender” rule is unreasonable because it “supplant[s] longstanding statutory and case law with an artificial and unprecedented standard that directly conflicts with existing law.”
  • The OCC failed to satisfy the substantive and procedural requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which constrains preemption determinations by the OCC. The OCC failed to meet these requirements by disregarding the CFPB consultation requirement and by failing to make preemption determinations on a “case-by-case basis.”
  • The “True Lender” rule conflicts with the OCC’s “longstanding policy” against rent-a-bank schemes in which “a National Bank merely acts as a conduit for loans that are illegal under states’ usury laws.”

In short, the Attorneys General asked the court to invalidate the “True Lender” rule as violating the Administrative Procedure Act.  Although the “True Lender” rule was issued to resolve legal uncertainty, with this lawsuit the uncertainty is not yet resolved.  Other industry groups are also likely to challenge the final “True Lender” rule.

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