OCC Finalizes True Lender Rule

Nov 2, 2020Federal Regulation, News

The Office of the Comptroller of the Currency (OCC) last week finalized its “true lender” rule, which applies a basic test to determine when a bank is considered the true lender when partnering with nonbanks. This is the most recent among many efforts made by the agency to address uncertainty regarding bank partnerships with nonbank financial institutions.

The final rule, “provides regulatory certainty for the industry and clarifies that banks retain compliance obligations for loans they originate,” said acting Comptroller Brian Brooks, according to American Banker. “It supports healthy markets, promotes access to credit, and protects against harmful ‘rent-a-bank’ arrangements.”

According to the rule, a national bank is considered the true lender if it is named as such in a loan agreement or if it funds the loan. The national bank is then responsible for making sure the loan follows consumer protection laws. However, state interest rate caps are not applicable. The OCC adjusted the proposal to say that if one bank is the named lender and another funds the loan, the named lender is considered the true lender.

The OCC originally issued its proposed rule in July, providing for comments on the proposed rule to be made until September 3.

“Lending relationships with third parties can also help banks meet customers’ need for affordable credit, including the needs of unbanked or underbanked individuals,” the proposed rule noted. “For example, these relationships can enable banks to market affordable loan products to a wider range of potential customers or to develop or acquire innovative credit underwriting models that facilitate expanded access to credit. Banks can also work with third parties to develop responsible lending programs to help customers meet credit needs, including small-dollar lending programs designed to assist with cash flow imbalances, unexpected expenses, or income shortfalls.”

The OCC and other agencies have taken steps to address uncertainty regarding state interest rate caps between bank and nonbank partnerships that cross state lines. In 2015, Madden v. Midland Funding limited banks’ ability to sell off loans. A rule finalized in May 2020 created a workaround to that decision, confirming that a loan’s interest rate can stay intact after it is acquired by an out-of-state purchaser with a lower rate cap.

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