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July 21, 2020

OCC Moves Forward on True Lender Test

By Dowse Bradwell "Brad" Rustin, IV, Craig Nazzaro, Elizabeth Donaldson, Samer A. Roshdy

As anticipated, on July 20, 2020, the Office of the Comptroller of the Currency (“OCC”) proposed rulemaking to determine that when a national bank or federal savings association makes a loan it is the “true lender,” when operating as part of a partnership between the national bank or federal savings association and a third party. The OCC stated the rulemaking would clarify that current regulations should be interpreted such that a bank or federal savings association makes a loan, if on the date of origination, the bank or federal savings association:

  1. Is named as the lender in the loan agreement. The OCC views this imprimatur as conclusive evidence that the bank is exercising its authority to make loans pursuant 12 U.S.C. 24. or
  2. Funds the loan. If a bank funds a loan on the date of origination, the OCC concludes that it has a predominant economic interest in the loan and, therefore, has made the loan—regardless of whether it is the named lender in the loan agreement as of the date of origination

The OCC has requested comments on all aspects of this proposal, including whether there are additional lending arrangements that should be captured by the OCC’s standards for determining when a bank makes a loan. Additionally, the OCC has requested comments as to whether the proposed standards would capture lending arrangements that should be explicitly excluded. The deadline for comments on the rule is September 3, 2020.

Within the proposal, the OCC acknowledged lending relationships between banks and marketplace lenders can be effective tools to facilitate affordable access to credit. However, the OCC documented the increasing uncertainty about the legal framework that applies to the loans made as part of these relationships; stating this uncertainty may discourage banks and third parties from entering into these beneficial relationships, limit competition, and chill the innovation that results from these partnerships—all of which may result in restricting access to affordable credit.

The OCC specifically called out the growing body of case law around the issue, citing cases where the courts have concluded either (i) that the form of the transaction alone resolves this issue, or (ii) the issue is resolve through a balancing tests looking at factors such as: (1) how long the entity named as the lender holds the loan before selling it to the third party; (2) whether the third party advances money that the named lender draws on to make loans; (3) whether the third party guarantees minimum payments or fees to the named lender; (4) whether the third party agrees to indemnify the named lender; and (5) how loans are treated for financial reporting purposes.

While this area of regulation continues to evolve rapidly, today’s proposal looks to resolve the uncertainty and enable banks to exercise the lending authority granted to them under Federal law.