On July 20, 2020, the Office of the Comptroller of the Currency (“OCC”) proposed a rule[1] that would clarify that a national bank or federal savings association (each, a “Federally Chartered Bank”) is the “true lender” of a loan if, as of the date of origination, it either (1) is named as the lender in the loan agreement; or (2) funds the loan (“Proposed Rule”). The Proposed Rule would address the uncertainty under federal law with regard to whether loans made pursuant to a partnership with a nonbank would be subject to the panoply of applicable federal laws and regulations governing lending by banks (including those providing for interest rate exportation).
While current federal banking law authorizes Federally Chartered Banks to extend credit to borrowers,[2] it does not describe how to determine whether a loan is made by a Federally Chartered Bank as opposed to, in the context of lending partnerships, the bank’s relationship partner. In the case of many lending partnership models, the nonbank partner may be the customer-facing entity, may play a leading role in creating and administering the program, and may even provide the funding for the loans (either at closing or through a prearranged purchase of the loan after closing). Such facts have created ambiguity as to which party is the true lender and courts have been split over how best to approach the question, with some looking solely to the form of the transaction, while others apply fact-intensive balancing tests.
The Proposed Rule would address this ambiguity by establishing a bright-line test where, regardless of any other facts, a Federally Chartered Bank will be the true lender of any loan when it either (1) is the lender of record in the loan agreement (regardless of whether it or its partner funds the loan); or (2) funds the loan (regardless of whether it or its partner is the lender of record). Moreover, the determination of which entity is making the loan would be complete as of the date the loan is originated. In this way, the Proposed Rule would be consistent with, and supplements, the OCC’s recent final rule indicating that interest permissible on a loan made by a Federally Chartered Bank is not affected by the subsequent sale, assignment or other transfer of the loan.[3]
In many cases, the permissible interest on a loan is the greatest consequence of determining that a Federally Chartered Bank is the true lender, rather than its nonbank partner. That is because federal banking law permits a Federally Chartered Bank to charge the highest interest rate permissible under the laws of any state where it is located.[4] It may then “export” that rate to borrowers in other states without running afoul of any state law which limits interest charges.[5] In contrast, if the bank’s nonbank partner were the true lender, the permissible interest rate would vary depending on the law of the borrower’s state.
Even more important in some cases is the fact that many states would require the nonbank partner to obtain a lending license, prior to making loans to their consumers. Obtaining and maintaining such licenses is a costly endeavor that many nonbanks cannot afford or wish to avoid.[6] In contrast, such licensing requirements do not apply to a Federally Chartered Bank.[7]
It is important to note, however, that while deeming a Federally Chartered Bank to be the true lender of a loan eliminates the need to comply with certain state lending laws, it conversely triggers extensive oversight by the OCC, as well as the application of an extensive array of federal laws and regulations governing lending by banks (including, but not limited to, those focused on consumer protection).
Moreover, in the preamble to the Proposed Rule, the OCC emphasizes that a Federally Chartered Bank must act in a safe and sound manner with regard to all of its lending activity, including by establishing and maintaining “prudent” underwriting practices,[8] extensive loan documentation practices[9] and appropriate internal controls and information systems.[10]
The deadline for comments on the Proposed Rule is Sept. 3, 2020.[11]
