Line in the Sand: OCC Issues Final Rule Adopting Bright-Line “True Lender” Standard

Capping off months of proposed rules and settlements addressing marketplace lending issues, on October 27, 2020, the Office of the Comptroller of the Currency (OCC) finalized a rule specifying that a national bank or federal savings association (collectively, “banks”) will be considered the “true lender” of a loan originated in connection with a lending partnership between the bank and a non-bank service provider if, as of the date the loan is originated, the bank is named as the lender in the loan agreement or funds the loan. Despite opposition from consumer advocate groups and state attorneys general, the OCC retained its “simple, bright-line test” to provide legal certainty the OCC said is “necessary for banks to partner confidently with other market participants and meet the credit needs of their customers.” Legal challenges are sure to follow.

The OCC noted that it received more than 4,000 comment letters on the July 2020 proposed rule, the “vast majority” of which were from individuals using one of three short-form letters to express opposition. In analysis that foreshadows its opposition to expected legal challenges (discussed below), the OCC addressed each of the primary opposition arguments as follows:

OCC’s authority to issue the rule. The OCC dismissed arguments that the rule exceeds the OCC’s legal authority, explaining the rule interprets statutes authorizing banks to lend by clarifying how to determine when a bank exercises its lending authority, and the OCC has “clear authority” to interpret these statutes. The OCC similarly rejected arguments that the final rule purports to extend federal preemption to non-banks and undermine state usury caps. Per the OCC, the final rule interprets federal banking law and has no impact on state usury caps if a non‑bank partner is the true lender.

Federal preemption procedure and the APA. The OCC explained that the agency was not required to comply with the Dodd-Frank preemption procedure provision because this provision applies only to case-by-case determinations that state consumer financial laws are preempted and the final rule is not a preemption determination. The OCC rejected comments asserting that the final rule violates the APA, re-stating its position that the APA requirement of rational and informed decision-making allows the OCC to rely on its expertise to address problems that may arise without the need for empirical or other data.

Rent-a-charter concerns. The OCC disagreed with state attorneys general (state AGs) and others who contend that the final rule would facilitate rent-a-charter arrangements. In the OCC’s view, the “clear and simple test” in the final rule and the “robust supervisory framework” applicable to all lenders and non‑bank service providers will create effective tools to address these schemes. The OCC emphasized bank responsibilities to establish and maintain prudent underwriting practices, loan documentation practices, and appropriate internal controls and information systems to assess and manage risks.

The OCC made one change in the final rule to address concerns that the proposal could create a scenario in which two banks are considered the “true lender” because one bank funded the loan and another bank is named as the lender in the loan agreement. The OCC added a provision to the final rule clarifying that in that circumstance, the bank named as the lender in the loan agreement is the lender that makes the loan. This change creates clarity for financing arrangements, such as warehouse lending, indirect auto lending, loan syndications, and other structured financings.

The OCC further clarified that the rule does not apply to retail sales of goods under retail installment contracts.

The final rule becomes effective on December 29, 2020.

Possible Challenges to the Final Rule

We expect swift legal action from state AGs, who filed a lengthy comment letter urging the OCC to withdraw its proposed rule. State AGs promptly filed suit to challenge the OCC’s “valid when made” rule. They likely will follow a similar path here.

In addition, if there is a change in Administration, we may see Congress attempt to use the Congressional Review Act (CRA) to overturn the final rule. The Office of Information and Regulatory Affairs has determined that the final rule is not a “major rule,” so a Government Accountability Office report is not required. However, the final rule will be submitted to Congress after the deadline for the CRA lookback period and will be subject to a renewed period for review by the new Congress.