Introduction

For the past few decades, banks have increasingly established relationships with third parties to help meet customers’ credit needs. These relationships help banks to streamline their services, manage their risks and offer more and varied avenues of credit.  However, the increased utilization of these relationships has resulted in increased uncertainty about the legal framework applying to the loans made as part of these relationships. The application of a particular framework can have varying results (e.g. different permitted interest rates depending on the applicable law, different regulatory requirements).

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”). Therefore, when the loan is originated as part of the bank’s third-party relationships, it is difficult to determine which legal framework applies to the loan. To date, the OCC has not taken regulatory action to resolve this ambiguity.

As a result, courts have adopted varying standards for resolving the ambiguity. Some courts have adopted a simple approach by stating that the lender is the entity named in the loan agreement. Other courts have adopted balancing tests with multiple factors including: (1) how long the entity named as the lender holds the loan before selling it to the third party; (2) whether the third party advances money that the named lender draws on to make loans; (3) whether the third party guarantees minimum payments or fees to the named lender; (4) whether the third party agrees to indemnify the named lender; and (5) how loans are treated for financial reporting purposes. But these factors are very subjective (and fact sensitive) and different courts afford different weights to each factor. Therefore, through the proposed rule the OCC seeks to provide regulatory clarity and certainty with respect to the true lender determination.

Proposed Rule

The proposed rule offers a clearer standard for determining the true lender of a loan. A bank is considered a lender if it: (1) is named as the lender in the loan agreement; or (2) funds the loan. By being named in the loan agreement, the OCC takes the position that the bank elects to subject itself to all applicable bank laws. By funding the loan as of the date of origination, the OCC takes the position that the bank has a predominant economic interest in the loan and therefore has made the loan (regardless of whether it was named the lender in the loan agreement). Further, the determination of the true lender is made as of the date the loan is originated, and would not change even if the bank subsequently transfers the loan. Accordingly, the legal framework in effect as of origination continues to apply. The proposed 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.

Since the OCC regulates national banks and federal savings associations, the proposed 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. Comments on the OCC proposed rule were due by September 3, 2020, and the OCC invited proposals for potential exclusions to the rule as well.  We continue to monitor the OCC publications for 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.