The OCC has issued a final rule to address when a national bank or federal savings association should be considered the “true lender” in the context of a partnership with a third party.  The final rule, adopted only 54 days after the close of the comment period, is effective 60 days after the date it is published in the Federal Register.

While the OCC’s final “Madden fix” (valid-when-made) 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, it did not address when a loan is deemed to made by a bank or savings association in the first place.  The “true lender” rule interprets the provisions of the National Bank Act (NBA), the Federal Reserve Act, and the Home Owners’ Loan Act (HOLA) (12 U.S.C. 24, 371 and 1464(c), respectively) that allow national banks and federal savings associations to engage in lending, by clarifying when a bank has exercised its lending authority.

Except for the addition of new subsection (c) that addresses a scenario in which one bank is named as the lender on the loan agreement and another bank funds the loan, the final rule adopts the proposed rule’s text.  The final rule provides:

(a) For purposes of this section, bank means a national bank or a Federal savings association.

(b) 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.

(c) If, as of the date of origination, one bank is named as the lender in the loan agreement for a loan and another bank funds that loan, the bank that is named as the lender in the loan agreement makes the loan.

The final rule provides a bright line test for determining when a bank is the lender for loans made with substantial assistance from a fintech or other non-bank company and/or when the fintech or non-bank company acquired all or a predominant economic interest in the loan.  Having submitted a comment letter in support of the OCC’s proposal, we are pleased that the OCC has finalized the rule substantially as proposed.  We continue to hope for a substantially similar “true lender” rule from the FDIC.

In its discussion of the final rule, the OCC indicated that the funding prong of its true lender test generally does not include lending or financing arrangements such as warehouse lending, indirect auto lending (through bank purchases of retail install contracts from auto dealers), loan syndications, and other structured finance.  This is because such arrangements do not involve a bank funding a loan at the time of origination.  The OCC also pointed out that, in contrast, the bank is the true lender in a table funding arrangement when the bank funds the loan at origination.  (In table funding arrangements, the bank is not named as the lender in the loan agreement.) 

While the OCC’s proposal garnered considerable support, it also met with significant criticism from certain state regulators and consumer groups who filed comment letters opposing the proposal.  The core criticism was the claim that the OCC’s proposal would support predatory lending and “rent-a-bank” schemes and therefore would be harmful to consumers and small businesses.  The OCC responded by pointing to its intent to use the considerable supervisory and enforcement tools at its disposal to ensure that the participants in bank-nonbank partnerships do not engage in unfair, deceptive or abusive acts and practices.

Ultimately, the final rule’s fate could well turn on the results of next week’s election. If elected President, Joe Biden could appoint a new Comptroller of the Currency who could then initiate new rulemaking to revoke the rule.  Also, if the election produces a “blue wave” with Democrats retaining control of the House and gaining control of the Senate and the Presidency, Congress could attempt to use the Congressional Review Act (CRA) to override the final rule.  Under the CRA, a joint resolution of disapproval cannot be filibustered in the Senate and can be passed with only a simple majority.

The enactment of a CRA joint resolution disapproving a final rule would prevent the rule from taking effect.  If a rule has already become effective, it no longer continues in effect and “shall be treated as though such rule had never taken effect.”  A joint resolution’s enactment would also bar an agency from reissuing the rule “in substantially the same form” or issuing a “new rule that is substantially the same” as the disapproved rule “unless the reissued or new rule is specifically authorized by a law enacted after the date of the joint resolution disapproving the original rule.”

If a successful CRA resolution is not forthcoming, we would expect one or more lawsuits challenging the Rule under the Administrative Procedure Act.  (Two lawsuits have been filed challenging the OCC’s “Madden fix” rule.)  Of course, we will report on all significant developments as they come down the pike.