OCC deems ‘true lenders’ responsible for actions of third-party partners

The OCC’s rule, slated to take effect 60 days after publication in the Federal Register, “specifies that a bank makes a loan and is the true lender if, as of the date of origination, it (1) is named as the lender in the loan agreement or (2) funds the loan.” The rule is intended to bolster accountability for banks regarding their third-party partners, clarifying which lender in the arrangement is responsible for following all federal banking laws.

The OCC proposed the true lender rule in July and solicited comments through September.

The OCC said the finalized rule clears up “legal uncertainty” regarding banks and their third-party lending partners and would “facilitate access to affordable credit.” The legal uncertainty might have served to “discourage banks and third parties from partnering, limit competition, and chill the innovation that results from these partnerships,” the OCC said in a press release.

Some of the 4,000 commenters who offered their opinions on the rule complained it might do the opposite—that is, encourage unscrupulous lenders to pair with federally insured financial institutions in “rent-a-bank” schemes. The lenders would potentially issue loans with bank funds at high interest rates. The bank could claim it does not have control over the interest rates set by its third-party lender, commenters noted.

The new rule makes it clear the bank that loans the money is the so-called “true lender,” and that true lender is responsible for the actions of its third-party partners, if those actions violate federal banking regulations.

“The rule also clarifies that as the true lender of a loan, the bank retains the compliance obligations associated with the origination of that loan, thus negating concern regarding harmful rent-a-charter arrangements,” the OCC stated.

In the rule itself, the OCC further clarified what a true lender’s obligations are for the actions of its third-party partners.

The rule provides “a clear and simple test for determining when a bank makes a loan,” the OCC said, and emphasizes “the robust supervisory framework that applies to any loan made by a bank and to all third-party relationships to which banks are a party.”

“If a bank fails to satisfy its obligations under this supervisory framework, the OCC will use all the tools at its disposal, including its enforcement authority,” the rule states.

The OCC also pointed banks and financial institutions to its frequently asked questions on third-party relationships that was first published in 2013, updated in 2017, and refreshed again in March. The updated FAQs address the responsibilities financial institutions have for the actions of their third parties, which can include cloud computing providers, data aggregators, and others. It also clarifies what a bank should do when one of its third parties engages in criminal activity, as well as how far a true lender’s risk flows down the vendor chain, say to the subcontractor of a third-party partner.

While the FAQs provide some answers to thorny questions about how far a bank’s risk rests on the actions of third-party partners, the OCC leaves it in the hands of the bank’s compliance division to determine whether those actions comply with federal banking regulations.

“A bank’s third-party risk management should be commensurate with the level of risk and complexity of its third-party relationships; the higher the risk of the individual relationship, the more robust the third-party risk management should be for that relationship,” the OCC said in the introduction to the FAQ. “It is up to bank management to determine the risks associated with each of the bank’s third-party relationships.”

The true lender proposal came two months after the OCC finalized a workaround of a 2015 court decision, Madden v. Midland Funding, that limited banks’ ability to sell off loans.

“That rule clarified that a loan’s interest rate can remain legally intact even after the loan is acquired by a purchaser in a state with a lower rate cap,” according to a story in American Banker.

The OCC said the new rule would “operate together” with its workaround of the Madden decision.