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New Regulation Alert: OCC Proposed New “True Lender” Rule May Reduce Claims Against Banks and Facilitate Partnered Lending

Loans made by national banks partnered with non-bank entities, like fintech companies, have led to increased litigation. A key question arises in those cases: who is the true lender—the bank or its fintech partner? The answer is important. If the “true lender” is a national bank, then federal regulations govern, and federal law may preempt the application of certain state laws.

To determine the “true lender,” courts and administrative agencies have created a complex set of rules, whose formulation and application varies. Some focus on the entity named in the loan documents; others apply fact-intensive balancing tests.

In late July, the Office of the Comptroller of the Currency addressed the uncertainty by proposing a new national definition of a “true lender.”[1] The proposed rule states that a national bank or federal savings association “makes a loan” if it (a) is named as the lender in the loan agreement or (b) funds the loan.

OCC’s proposed rule will apply to a range of statutes, including the National Bank Act, the Federal Reserve Act, and the Home Owners’ Loan Act.

The rule explains the rationale. Either the “the bank has elected to subject itself to the panoply of applicable Federal laws and regulations” by executing the loan documents or the bank has “has a predominant economic interest in the loan” because it funded the loan. OCC sees either circumstance as “conclusive evidence” of “true lender” status. Importantly, the national bank’s status as the “true lender” does not change even if the loan is transferred.

This should be welcome news for banks. The proposed rule is simple and provides a bright line definition. If finalized, the rule will end the different formulations of the “true lender” doctrine and limit unnecessary litigation. And by eliminating uncertainty, it will encourage expansion of financial entity partnerships. OCC explicitly recognized that these partnerships can “help banks meet customers’ need for affordable credit, including the needs of unbanked or underbanked individuals.”

Comments on the OCC’s proposed rule are open until September 3, 2020.

[1] See NPRM, Fed. Reg. Vol. 85, No. 141.