Less than two months after issuing its final “Madden fix” rule, the OCC has now issued a proposed rule to address when a national bank or federal savings association should be considered the “true lender” in the context of a third party relationship.  Comments on the proposal, which was published in today’s Federal Register, must be filed by September 3, 2020.

The OCC’s final “Madden fix” rule confirmed that the assignee of a loan made by a national bank or federal savings association may charge the same interest rate that the bank or savings association is authorized to charge under federal law but did not address when a loan is deemed to made by a bank or savings association.  In discussing its proposal, the OCC notes that provisions of the National Bank Act (NBA), the Federal Reserve Act, and the Home Owners’ Loan Act (HOLA) (12 U.S.C. 24, 1464(c), and 371, respectively) that allow national banks and federal savings associations to extend credit do not indicate how to determine when a bank has exercised such authority and, rather than its relationship partner, has made a loan.

The OCC’s proposed rule interprets these statutes to provide:

For purposes of [the provisions of the NBA, Federal Reserve Act, and HOLA that authorize national banks and federal savings associations to extend credit and the provisions of the NBA and HOLA that govern the interest permitted on national bank and federal savings association loans (12 U.S.C. 85 and 1463 (g), respectively)], a national bank or Federal savings association makes a loan when the national bank or Federal savings association, as of the date of origination:
(1)  Is named as the lender in the loan agreement; or
(2) Funds the loan.

The proposal is intended to remove the uncertainty that has resulted from the courts’ use of divergent standards (which the OCC describes in its background discussion) to determine which entity is the “true lender” by creating “a clear test to determine when a bank makes a loan.”  The OCC indicates that the determination of which entity made a loan under its proposed standards “would be complete as of the date the loan is originated and would not change, even if the bank were to subsequently transfer the loan.”  Once it is determined that a loan has been made by a bank under the OCC’s standards, “the applicable Federal legal framework (1) determines the interest permitted on the loan, pursuant to 12 U.S.C. 85 and 1463(g), and (2) permits the loan to be subsequently sold, assigned, or otherwise transferred without affecting the interest term, pursuant to the Madden-fix rule.”

With regard to its first basis for treating the bank as the “true lender,” the OCC states that “if a bank is named in the loan agreement as the lender as of the date of origination, the OCC views this imprimatur as conclusive evidence that the bank is exercising its authority to make loans pursuant to [the NBA/Federal Reserve Act or HOLA] and has elected to subject itself to the panoply of applicable Federal laws and regulations (including but not limited to consumer protection laws) governing lending by banks.” 

With regard to its second, alternative basis for treating the bank as the “true lender,” the OCC indicates that it is intended to capture “circumstances in which a bank is not named as the lender in the loan agreement but is still, in the OCC’s view, making the loan.”  Under this funding standard, “if a bank funds a loan as of 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.”

A substantial portion of the OCC’s background discussion is devoted to the regulatory and supervisory consequences that flow from a determination that a bank is the “true lender.”  The OCC describes the underwriting standards and loan documentation policies and procedures that the OCC expects a bank to have.  It also highlights various federal consumer protection laws, such as federal UDAAP and fair lending laws, with which a bank must comply.  In addition, the OCC references its requirement for “banks engaged in lending to take into account the borrower’s ability to repay the loan according to its terms” (but does so in the context of secured lending), lists lending practices “that may be considered predatory, unfair, or deceptive,” and identifies the issues it evaluates “as part of its routine supervision of a bank’s lending relationships with third parties.”  Thus, the OCC makes it clear that the adoption of its Madden and “true lender” fixes should not be taken as a sign that conduct injuring borrowers will be tolerated.

Previously, Acting Comptroller of the Currency Brian Brooks indicated that the OCC expected to partner with the FDIC in developing the OCC’s “true lender” rule.  Presumably, we will soon see a proposed “true lender” rule from the FDIC.

With the finalization of its “Madden-fix” rule and issuance of its proposal to define the circumstances under which a national bank or federal savings association is the “true lender,” the OCC has responsibly taken the bull by the horns to remove the cloud of uncertainty hanging over billions of dollars of loans, including “bank model” marketplace loans, credit card receivables sales and securitizations, and private label credit card programs.  (In 2017, Alan Kaplinsky wrote an article for American Banker urging the OCC to use its rulemaking authority to address this issue.)  While consumer groups have already threatened to challenge the OCC rules, the U.S Supreme Court’s decision in Smiley v. Citibank, N.A., 517 U.S. 735 (1996), in which the Court deferred to an OCC rule interpreting the term “interest” in Section 85 of the NBA to include late fees, suggests that the OCC’s proposal is on firm grounds.

In addition to a litigation challenge by consumer groups, Congress could attempt to use the Congressional Review Act to override the OCC’s “true lender” rule once it is finalized.  Also, if elected President this fall, former Vice-President Biden could appoint a new Comptroller who does not support the OCC’s approach to “true lender” taken under Acting Comptroller Brooks’ leadership.

We have been litigating the “true lender” issue for almost two decades and have structured many loan programs over this period to address the possibility of a “true lender” or Madden challenge.  In Hudson v. Ace Cash Express, Inc., 2002 WL 1205060 (N.D. Ind. 2002), we convinced the court that the need for certainty in the application of federal banking laws required it to honor the bank’s formal role as lender instead of participating in the case-by-case development of factually intensive recharacterization rules.  We are delighted that the OCC sees it the same way.