Even before the rise of fintechs, bank partnerships were commonplace among specialty lenders. Federal law has allowed banks to enter into such contracts to make loans on behalf of third party lenders for a long time, and yet, guidelines have been unclear as to who the “true lender” is in these arrangements, giving way to vastly different - and inconsistent - interpretations by state lawmakers.
Depending on which state a lender does business in, the court may decide the online lender is the true lender, which means it is subject to different interest rate and fee limits, as well as other licensing requirements.
For the first time, the OCC has stepped in to settle the argument with a new rule. Under the rule, the bank that makes a loan is the true lender as of the date of origination if it is named as the lender in the loan agreement, or if the bank funds the loan.
“Banks’ lending relationships with third parties can facilitate access to affordable credit. However, the relationships have been subject to increasing uncertainty about the legal framework that applies to loans made as part of these relationships,” said the OCC in an announcement made Monday. “This uncertainty may discourage banks and third parties from entering into relationships, limit competition, and chill the innovation that results from these partnerships—all of which may restrict access to affordable credit.”
According to lawyers at Morgan Lewis, the proposed rule has the potential to provide “material clarity” to banks and their online lending partners, who have always had to deal with the“substantial legal uncertainty” of different courts producing different decisions. Many ABS lenders, like LendingClub, partner with national banks to originate their loans.
Sources say the proposal is well articulated, and appears highly likely that the rule will pass.
“The OCC has the power to pass this. The agency is not releasing a new rule under any new statute, nor is this a corner case interpretation of their powers,” said Prat Vallabhaneni, partner at White & Case and former Federal Deposit Insurance Corporation (FDIC) attorney in an interview with GlobalCapital. “The OCC has robust powers to promulgate regulations concerning both front end origination and back end selling/securitizing of loans, so I would be surprised if any litigation here gains any traction.”
The new true lender rule will work in tandem with the "Madden rule" which the OCC also finalized last month. The Madden fix resolved uncertainty created by the Madden v. Midland Funding decision by determining that even when a bank transfers a loan, the interest on the loans are the same before and after the transfer.
“The current acting comptroller is more open to rules that seek clarity and consistency for businesses to operate nationwide, particularly in the fintech space,” added Vallabhaneni. “[The new true lender proposal] could’ve happened at any time in prior years as the rule is not based off of any new statute, so who has the comptroller's seat in the OCC at any particular point in time certainly does matter."
There is still the chance that a new administration may take over after the November elections, cautioned Morgan Lewis lawyers in a client memo. Particularly under a Democratic administration, it is likely that such a rule may be struck down because of consumer protection concerns. Banks and online lenders are also still subject to specific state laws, since the FDIC has yet to issue their version of a true lender rule.
The deadline to submit comments for the proposed rule is September 3.