Ballard Spahr LLP has submitted a comment letter to the OCC in support of its proposed rule, “National Banks and Federal Savings Associations as Lenders” (the “Proposed Rule”). As detailed in our letter, we applaud the Proposed Rule, which would establish a clear and logical bright line confirming and clarifying that a bank (or savings association) is properly regarded as the “true lender” when, as of the date of origination, the bank is named as the lender in a loan agreement or funds the loan. The Proposed Rule, coupled with the OCC’s recently adopted Madden-fix (valid-when-made) rule, would eliminate confusion, uncertainty and legal risk for banks and their counterparties as they work together to make credit more readily available nationwide, a particularly urgent need as we face the economic crisis caused by COVID-19.

As the OCC points out in its notice of proposed rulemaking for the Proposed Rule (the “NPR”), the financial system is most efficient when banks work effectively with other market participants to meet customers’ credit needs: for example, in securitizations and other arrangements where sales of loans to third parties allow banks to manage risk and maintain liquidity; in Bank-Agent Programs (described below) involving fintechs or other third parties that engage in marketing, operational and other support roles; and in private label credit card programs and other programs where banks partner with retailers and other entities to make credit more broadly available. The Proposed Rule, if adopted, would significantly benefit all parties involved in these arrangements, including their ultimate beneficiaries – the borrowers – by removing risks created by those who would undermine the ultimate goals of the National Bank Act.

Our letter draws on Ballard Spahr’s two-plus decades of experience in representing banks and savings associations (“Banks”) in establishing lending programs (“Bank-Agent Programs”) where a Bank obtains substantial assistance from a fintech or other non-Bank company (an “Agent”) to offer Bank loans to consumers or small businesses. The Firm also has defended Banks and Agents in numerous class action and government enforcement proceedings arising from Bank-Agent programs, in particular challenges based on the assertion that the Agent, and not the Bank, is the “true lender” and, accordingly, the home-state interest exportation right provided to Banks under federal law is inapplicable. The Proposed Rule effectively finds these challenges incompatible with the federal laws governing the interest charges Banks are permitted to impose (the “Federal Interest Statutes”).

As our comment letter explains, in a typical Bank-Agent Program, an Agent may serve as marketing and servicing agent to a Bank that charges interest on its loans nationwide at the rates allowed by federal banking law and the law of the state where the Bank is located. After origination, the Bank sells the loans (or an interest in the loans) to the Agent or an institutional investor identified by the Agent. A small but growing number of cases have addressed whether the “true lender” in a Bank-Agent Program is the Bank or its Agent. The better reasoned cases have determined the Bank is the “true lender”, given it is the named lender in the loan agreements, and have accordingly declined to recharacterize the Agent as the “true lender”. Decisions willing to recharacterize the Agent as the “true lender” fail to justify the particular line they have chosen for when the Agent is deemed the “true lender” or to tie their test to any pre-existing legal doctrines. Instead, these decisions have applied widely diverging, fact-intensive tests in an effort to demonstrate that the Agent should be recharacterized as the true lender based on factors such as the level of the Agent’s economic interest arising out of the Bank-Agent Program. The Proposed Rule would provide a bright-line standard confirming and clarifying that the Bank in a Bank-Agent Program (and in any other type of arrangement involving other market participants) is the “true lender” when, as of the date of origination, the Bank is named as the lender in the loan agreement or funds the loan.

Some attacks on Bank-Agent Programs, securitizations and other Bank-counterparty programs also have challenged the validity of the original interest rate after a loan is sold. The OCC’s Madden-fix rule, adopted to address these challenges, clarified that an interest rate permissible at the outset remains valid after a loan sale. However, as noted in the NPR, the OCC recognized that even after it adopted the Madden-fix rule, “uncertainty remains regarding how to determine if a loan is, in fact, made by a bank as opposed to by its relationship partner”, and in the Proposed Rule provides a clear test to determine when a Bank makes a loan.

Three virtually identical Federal Interest Statutes govern interest that may be charged by Banks: Section 85 of the National Bank Act (“NBA”), 12 U.S.C. § 85 (“Section 85”) which governs the interest charges of national banks; Section 4(g) of the Home Owners’ Loan Act (HOLA), 12 U.S.C. § 1463(g) (“Section 4(g)”), which governs the interest charges of federal and state savings associations; and Section 27(a) of the Federal Deposit Insurance Act (the “FDIA”), 12 U.S.C. § 1831d(a) (“Section 27(a)”), which governs the interest charges of state-chartered FDIC-insured banks.  In our comment letter, we argue that the Proposed Rule and the Madden-fix rule properly effectuate the policies underlying the Federal Interest Statutes. The ability of Banks to sell loans (or interests in loans) serves important economic and safety and soundness goals by affording Banks access to alternative sources of liquidity, helping them manage lending concentrations and improving their financial performance ratios. The threat that a counterparty might be recharacterized as a “true lender” based on the level of its economic interest would interfere with loan sales in Bank-Agent Programs, securitizations and other funding arrangements. The recharacterization threat also diminishes both the opportunity for innovation in lending products and the availability of credit, especially for consumers with risker credit profiles. Bank-Agent Programs give Banks access to cutting-edge technology to better and more efficiently serve customer needs and promote broader access to consumer credit and financial inclusion, but the chilling effect on Bank-Agent Programs caused by the recharacterization threat, if allowed to continue, could deprive Banks and their customers of all these benefits.

The OCC clearly has the authority to adopt the Proposed Rule. Under 12 U.S.C. § 93a, the OCC is generally “authorized to prescribe rules and regulations to carry out the responsibilities of the office.” And, Congress has charged the OCC “with assuring the safety and soundness of, and compliance with laws and regulations, fair access to financial services, and fair treatment of customers by, the institutions and other persons subject to its jurisdiction.” 12 U.S.C. § 1 (emphasis added). Further, to the extent clarification of Congressional language is necessary, as appears to be the case in this instance given several courts’ opinions reflecting confusion in interpreting the effect of the Federal Interest Statutes on Bank–counterparty arrangements, the Supreme Court has long recognized that judicial deference is warranted to the informed views of agencies such as the OCC. As the Supreme Court instructed in Smiley v. Citibank (South Dakota), N.A., 517 U.S. 735, (1996):

It is our practice to defer to the reasonable judgments of agencies with regard to the meaning of ambiguous terms in statutes that they are charged with administering. See Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc., 467 U. S. 837, 842845 (1984). As we observed only last Term, that practice extends to the judgments of the Comptroller of the Currency with regard to the meaning of the banking laws. “The Comptroller of the Currency,” we said, “is charged with the enforcement of banking laws to an extent that warrants the invocation of [the rule of deference] with respect to his deliberative conclusions as to the meaning of these laws.” NationsBank of N.C., N.A. v. Variable Annuity Life Ins. Co., 513 U. S. 251, 256-257 (1995) (citations and internal quotation marks omitted).

Significantly, the Supreme Court in Smiley, relying upon Marquette Nat’l Bank of Minneapolis v. First of Omaha Service Corp., 439 U.S. 299 (1978), accorded deference to the OCC with respect to the very statutory provision (Section 85 of the National Bank Act) at issue under the Proposed Rule.

The OCC’s proposed bright-line standard for determining when a bank should be regarded as the “true lender” supports the certainty needed to ensure the effectiveness, and the safety and soundness, of the national banking system. It also would enhance the ability of banks readily to offer credit nationwide on the interest terms allowed by the laws of their home states, serving the public purpose of making credit as widely available as possible on reasonable terms, and subject to the oversight of the OCC to ensure fairness and compliance with applicable laws.

Although the FDIC recently issued a Madden-fix (valid-when-made) rule that reaches the same results under the FDIA as does the OCC’s Madden-fix rule, the FDIC has not proposed a companion “true lender’ rule. We urge the FDIC to propose and adopt a true lender rule that mirrors the OCC’s Proposed Rule. This would help effectuate the policy of Section 27 of the FDIA to keep state banks on an equal footing with national banks in terms of nationwide lending rights.

While we believe that adoption of the Proposed Rule would greatly advance the availability of credit and efficient Bank operations, our letter also notes one potentially problematic aspect of the Proposed Rule.  In the preamble, the OCC warned that it will be vigilant in addressing unfair, deceptive and abusive acts and practices (“UDAAP”).  While we fully support the OCC’s commitment to prevent UDAAP violations through its supervisory and enforcement powers, we have some concern that the language of one factor the OCC proposes to evaluate could be mistakenly read to indicate the OCC would impose a limitation on aggregate interest charges in Bank-Agent Programs and other Bank programs involving third parties.  The preamble to the Proposed Rule states:

[T]he OCC evaluates the following as part of its routine supervision of a bank’s lending relationships with third parties:

* * *

Are the bank’s overall returns on the loans reasonably related to the bank’s risks and costs of the loans (e.g., the total credit costs on short term loans, such as 12- to 36- month loans, are not substantial in relation to, or do not exceed, the principal amount of the loan)?

Id. at 44227.

As explained more fully in our letter, we believe these references to overall returns and their relationship to the principal amount of the loan may imply that the OCC might take actions that would infringe on a role Congress has delegated to the CFPB, and would be misguided from a policy perspective. Not only is there no substantive basis to conclude that interest charges in excess of original principal balances evidence UDAAP problems, but an OCC rule to such effect would usurp the exclusive authority of the CFPB to adopt UDAAP rules. Further, such a rule would conflict with the Federal Interest Statutes, which uniformly provide that a Bank may charge and collect interest at the rates authorized by the law of the Bank’s home state. The OCC has no power or authority to impose its own limits on interest charges – even the CFPB is explicitly denied the right to establish usury limits. See 12 U.S.C. § 5517(o).

Accordingly, in our letter, we express our hope that, in its preamble to the final rule it adopts, the OCC will clarify that the interest on loans is not limited to the original principal amount of the loan, and that the OCC would not adopt limits on interest rates.