While Federal law authorizes banks to enter into contracts and make and transfer loans, such law does not specifically address the entity that makes a loan (i.e., the “true lender”). Accordingly, when the loan is originated as part of the bank’s third-party relationships, it has been difficult to determine which legal framework applies to the loan. Further, courts have adopted varying standards for resolving this ambiguity. The intent of the final rule is to establish a clear test for determining when a bank makes a loan.

Final Rule

The final rule adopted the language of the proposed rule with little change. Under the final rule, a bank is considered a lender if: (1) it is named as the lender in the loan agreement; or (2) it funds the loan at origination. The determination of the true lender is made as of the date the loan is originated, and does not change even if the bank subsequently transfers the loan.

Accordingly, the legal framework in effect as of origination continues to apply. The final rule also makes clear that loans made under third-party lending relationships remain subject to extensive federal regulations prohibiting predatory, unfair or deceptive lending practices. The OCC expects the true lender to establish and maintain prudent underwriting standards and loan documentation policies and procedures, as well as comprehensive due diligence and oversight of its third-party relationships.

Changes from Proposed Rule

Many of the commenters to the proposed rule raised a concern that under the proposed language, more than one bank could be the true lender if, for example, at origination, one bank is named as the lender in the loan agreement and another bank actually funds the loan. To address this issue, the final rule states that in this situation, the bank named as the lender in the loan agreement is the bank that has originated the loan and is the true lender.

A number of commenters also asked the OCC to include safe harbor requirements and exceptions for certain lending/financing arrangements such as warehouse lending, loan syndication and other structured finance. The OCC did not include any such safe harbors or exceptions, but noted that the commenters were “correct that the funding prong of the proposed rule generally does not include these types of arrangements: they do not involve a bank funding a loan at the time of origination.”[1]

Further, the OCC acknowledges that while the intent is to have a “clear and simple test for determining who is the true lender,” there may sometimes be circumstances or relationships that make the application of the test imprecise. In these situations, the OCC encourages banks to contact the OCC for guidance.

Commenters also raised concerns that the rule could facilitate inappropriate “rent-a-charter” lending schemes, where a bank receives a fee to “rent” its charter to a third party to evade various state and local laws. The OCC disavowed these arrangements as having “absolutely no place in the federal banking system,” and stated that the final rule “holds banks accountable for all loans they make, including those made in the context of marketplace lending partnerships or loan sale arrangements.”

Since the OCC regulates national banks and federal savings associations, the final rule does not reach state banks. The FDIC has yet to propose a similar rule for state banks, but Acting Comptroller Brian Brooks has said that he expected the FDIC to do so.  

The final rule was published in the Federal Register on October 30, 2020, and goes into effect December 29, 2020. The OCC hopes that the certainty of the rule will encourage banks to expand their credit offerings and existing third-party relationships, as well as to engage in new lending relationships. Opposers of the rule, however, including many state attorneys general, could raise formal challenges to the final rule. We will continue to monitor further developments and will update this article accordingly.

The foregoing information is provided only for general reference. It does not constitute legal advice. Legal advice may be provided based only on specific facts. Please consult us before relying on any general information stated herein. We are happy to discuss any questions you may have regarding trademarks.

[1] With respect to warehouse lenders, the OCC stated in the final rule: “When a bank provides a warehouse loan to a third party that subsequently draws on that warehouse loan to lend to other borrowers, the bank is not funding the loans to these other borrowers. In contrast, and as noted in the proposal, the bank is the true lender in a table funding arrangement when the bank funds the loan at origination.”