OCC proposal seeks to clarify when banks are ‘true lender’

Several provisions of federal banking law grant banks the authority to make loans, but “none describes how to determine when a bank has, in fact, exercised this authority, and when, by contrast, the bank’s relationship partner has made the loan,” the OCC said in its proposal. At the moment, this ambiguity leaves it up to courts to determine the true lender when loans, sold by their original lender, end up in legal disputes.

“If the bank makes the loan in the context of a relationship with a third party, the OCC ensures that the bank has instituted appropriate safeguards to manage the associated risks,” the proposal said. “In contrast, if a third party makes a loan as part of a relationship with a bank, the OCC is not the prudential regulator of the lending activity, though it still assesses the bank’s third-party risk management in connection with the relationship itself.”

Banks enter into relationships with third parties to gain access to affordable credit, the OCC said, but may become reluctant to do so if this ambiguity in federal banking law is not clarified.

“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,” the OCC said in a press release.

The “true lender” proposal comes 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 proposal would “operate together” with its workaround of the Madden decision.

Comments on the rule proposal can be made until Sept. 3, 2020.