States sue to overturn OCC real lender rule

New York, California and six other states filed a long-awaited January 5 lawsuit seeking to strike down the recently issued “True Lender” rule by the Office of the Comptroller of the Currency (“OCC”). As previously reported, the OCC’s True Lender Rule – finalized in October and in effect December 29 – provides clear tests to determine, in the context of a lending partnership between a national bank (or federal savings) and a third party (often a FinTech or other non-bank company), which entity actually “made” the loan, that is to say, which entity was the “real lender”.

Identifying the “real lender” in such partnerships can be critical in enforcing the usury limits of state law, as a national bank (unlike a non-bank) can “export” the limit from usury in the state where it is “located” when this limit is greater than the usury ceiling in the borrower’s state. The practical effect of the clear criteria of the True Lender Rule, in cases where they designate the national bank as the lender of the loan, is to exclude arguments that the non-bank partner was the “real lender” (and therefore subject at a lower wear cap) under quite different multifactorial tests in some recent legal opinions which generally claim to elevate “substance over form”.

In the view of the OCC, the clear tests provide the certainty necessary for the promotion of cost-effective partnerships between banks and non-banks, which, among other things, can expand access to credit for unbanked consumers and underbanked. Under the most important test of the True Lender Rule, the national bank will be the true lender if it is “named as the lender in the loan agreement,” a test that matches how the truth in lending law has determined for decades which entity is the “creditor” under this law.

The claimant states in this lawsuit generally contend that the true lender rule “makes it easier to[s] predatory loans ”by effectively depriving States of their ability to impose their usury limits on consumer credit to borrowers in their jurisdiction. These usury limits should apply to most banking partnerships, they argue, because more often than not, the non-bank partner would be referred to as the “real lender” based on multi-factor tests they deem more appropriate. Many of these lending partnerships are viewed by governments as “shell bank leasing schemes”.

These general state arguments are quite similar to those made by three states last year in their still-current challenge to the OCC’s “Valid-When-Made” rule, which also seeks to promote partnerships between banks and corporations. non-banks. Another group of eight states also challenged the corresponding “Valid-When-Made” rule applicable to state-chartered banks, issued by the FDIC. (The FDIC recently revealed that it does not intend to issue a “true lender” rule on these banks.) A bank originated a loan, this rate d The interest does not become invalid if the loan is subsequently assigned to a non-bank institution.

In this week’s trial, the specific assertion by the complainant states is that the True Lender Rule violates the Federal Administrative Procedure Act (“APA”) for the following reasons, among others: (1) the OCC rushed rule making and thus ignored many of the 4000 comments it received on the proposed rule; (2) Federal banking laws invoked by the OCC, which describe the lending powers of national banks, do not allow the OCC to determine who is the “real lender” in a lending partnership; (3) the clear criteria adopted by the OCC are unreasonable, given the various multifactorial criteria found in the case law; (4) the OCC in fact prevails over “state consumer financial law” which, under the Dodd-Frank Act, cannot fail to follow the standards now codified in 12 USC § 25b ; and (5) the OCC is reversing a long-standing policy against “rent-a-bank” programs without a reasoned explanation.

The OCC anticipated and addressed many of these APA arguments in the preamble to the final version of the True Lender Rule released last October. However, it is not yet clear how the OCC will ultimately react to this trial, given the likelihood of a change in leadership following the inauguration of President-elect Biden and the antipathy expressed by some Democrats towards these partnerships of ready. We will continue to monitor developments in this and related areas of law that impact banking partnerships with FinTechs and other companies.

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