A bipartisan group of five House members introduced a bill (H.R. 4439) last month that is intended to address the so-called “true lender” issue, which creates risk with respect to some loans made by banks with substantial marketing and servicing assistance from nonbank third parties, and then sold shortly after origination. These loans have been challenged by regulators and others on the theory that the nonbank marketing and servicing agent is the “true lender,” and therefore the loan is subject to state licensing and usury laws.
This bill is a welcome accompaniment to the “Madden fix” bills that have been introduced in the House and Senate to eliminate the uncertainties created by the Second Circuit’s decision in Madden v, Midland Funding. (The House bill was passed by the House Financial Services Committee last month.) In Madden, the Second Circuit ruled that a nonbank that purchases loans from a national bank could not charge the same rate of interest on the loan that Section 85 of the National Bank Act allows the national bank to charge.
Both “Madden fix” bills would amend Section 85, as well as the provisions in the Home Owners’ Loan Act, the Federal Credit Union Act, and the Federal Deposit Insurance Act that provide rate exportation authority to, respectively, federal savings associations, federal credit unions, and state-chartered banks, to provide that a loan that is made at a valid interest rate remains valid with respect to such rate when the loan is subsequently transferred to a third party and can be enforced by such third party even if the rate would not be permitted under state law. (The same “Madden fix” provision is in the Appropriations Bill (H.R. 3354) passed by the House in September 2017.)
As we have previously observed, the enactment of legislation reaffirming the valid-when-made doctrine, like the adoption of the OCC’s proposal to create a fintech charter, would help some companies avoid Madden’s negative impact. However, it would not help nonbank companies deal with the risk of a court or enforcement authority concluding that the nonbank company, rather than its bank partner, is the “true lender.” Treating a nonbank as the “true lender” would subject the nonbank to usury, licensing, and other limits to which its bank partner would not otherwise be subject.
The “true lender” bill would amend the Bank Service Company Act to add language providing that the geographic location of a service provider for an insured depository institution “or the existence of an economic relationship between an insured depository institution and another person shall not affect the determination of the location of such institution under other applicable law.” The bill would amend the Home Owners’ Loan Act to add similar language regarding service providers to and persons having economic relationships with federal savings associations.
It would also amend Section 85 of the National Bank Act to add language providing that a loan or other debt is made by a national bank and subject to the bank’s rate exportation authority where the national bank “is the party to which the debt is owed according to the terms of the [loan or other debt], regardless of any later assignment. The existence of a service or economic relationship between a [national bank] and another person shall not affect the application of [the national bank’s rate exportation authority] to the rate of interest rate upon the [loan, note or other evidence of debt] or the identity of the [national bank] as the lender under the agreement.” The bill would add similar language to the provisions in the Home Owners’ Loan Act and Federal Deposit Insurance Act that provide rate exportation authority to, respectively, federal savings associations and state-chartered banks.
While we might have preferred to see additional language in the bill’s findings that makes it even clearer how the bill is intended to apply (such as citations to cases that are examples of the analysis the bill seeks to correct or a direct statement that the lender’s identity should not be determined by who holds the predominant economic interest), the bill is certainly a very positive development as drafted.