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New OCC pick will put out the last dying embers of 'true lender' rule

Charcoal embers ready for grilling

Omarova will tighten OCC's grip on fintechs and bank partners — Wall Street is right to freak out

From the American Bankers Association to marketplace lending investors, Wall Street is “freaking out” over the nomination of Saule Omarova for comptroller at the Office of the Comptroller of the Currency (OCC).

And with good reason: An outspoken critic of both digital currencies and big banks, she will, among many other things, extinguish all hope for the return of the “true lender” rule, or even the “valid when made” doctrine.

Omarova is a distinguished figure in the capital markets, having built an impressive career as a professor at Cornell Law School and as a banking attorney and an official at the Treasury. However, many are concerned about her views, honed in academia, on systemic changes to the banking industry.

Omarova also has a long history of criticizing financial innovation, whether it be cryptocurrencies or other fintech. She tends to think the risks of reckless growth and market disruption outweigh the benefits — at least to the consumer.

In securitization, her appointment means the sun is finally setting on the “true lender” rule, a provision that made it easy for non-bank marketplace lenders to originate loans by partnering up with banks. Created in October 2020 under comptroller Brian Brooks, a huge proponent of fintech, the law brought regulatory clarity and reduced the compliance burden on innovative firms.

Much to the dismay of marketplace lenders, the rule was repealed soon afterward, under May's Congressional Review Act. The law prohibited the OCC from reissuing any rule that would be in “substantially the same form.”

Despite this, market participants had quietly hoped for — and even expected — some new version of the “true lender” rule to make a comeback eventually.

But Omarova's appointment puts that hope to rest. If anything, it adds momentum in the opposite direction — toward an increase of state regulation of online lenders and their bank partners.

The upshot is more uncertainty for all parties involved in securitizations of marketplace loans, from banks to noteholders. In the past, the lack of the rule led to inconsistent and conflicting rulings when states would have to decide who is the “true lender” responsible for complying with state laws and paying fees.

It seems likely that Omarova will require online lenders to obtain a license in every state they operate in, rather than suggesting a flexible alternative.

“In an environment where consumer protection is top of the agenda, there will be more regulatory risk associated with the securitization receivables, whether it’s more traditional consumer asset classes or fintech,” said one securitization lawyer. “[Omarova] has got my clients freaking out.”