OCC Issues Proposed True Lender Rule

On Monday, the Office of the Comptroller of the Currency (OCC) proposed a new rule that would clarify when banks are the “true lenders” of loans when involved with third parties. In so doing, the rule would resolve key uncertainties that often discourage banks from entering relationships with third parties, which ultimately limits consumer access to affordable credit.

“The U.S. economy relies on access to affordable credit to fuel economic growth and job creation,” the proposal notes. “Americans rely on affordable credit to reach goals large and small, ranging from purchasing consumer goods, cars, and homes to starting or growing small businesses. While national banks and Federal savings associations (banks) play a critical role in supplying this credit, the financial system is most efficient when banks work effectively with other market participants to meet customers’ needs. These relationships allow banks to manage their risks and leverage their balance sheets to increase the supply of available credit in ways they would not be able to if they were acting alone.”

“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 also notes. “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.”

Relationships between banks and third parties have been subject to uncertainty about the legality of loans made as a part of the partnerships. The true lender rule, if enacted as proposed, would settle that uncertainty by clarifying that a bank is the true lender if it is named as the lender in the loan agreement or if it funds the loan.

In May 2020, the OCC finalized a workaround of Madden v. Midland Funding, a 2015 court decision that restricted banks’ capability to sell off loans. The OCC’s new proposal is meant to operate jointly with the Madden court decision.

According to American Banker, “that rule clarified that a loan’s interest rate can remain legally intact even after the loan is acquired by a purchaser in a state with a lower rate cap.”

Comments for the proposed rule can be made until September 3, 2020.