New York, California, and six other states passed a widely anticipated Jan 5 lawsuit for a declaration of invalidity the “True Lender” rule recently issued by the Office of the Comptrollers of the Currency (“OCC”). As we previously reported, the True Lender Rule of the OCC, which was concluded in October and has been in force since December 29, offers as part of a credit partnership between a national bank (or federal savings bank) and a third party (often a FinTech or other non-bank company ), which company actually “granted” the loan, iewhich company was the “real lender”.
The identification of the “true lender” in these partnerships can be decisive when applying national usury limits, since a national bank (in contrast to a non-bank) can “export” the usury limit from the state in which it is “resident” is higher than that Usury limit in the borrower’s state. The practical effect of the Bright Line tests of the True Lender Rule is, in cases in which they refer to the National Bank as the lender, to completely exclude arguments that the non-bank partner was the “real lender” (and thus a lower usury ceiling) other, multi-stage tests in some recent court opinions that generally purport to raise “substance over form”.
From the point of view of the OCC, brightline tests offer the necessary security for the promotion of economically advantageous partnerships between banks and non-banks, which among other things can expand access to credit for consumers with and without bank details. According to the most important test of the True Lender Rule, the National Bank is the true lender if it is “named in the loan agreement as the lender”, a test that is based on the decades-long determination of the Truth-in-Lending Act as to which company is the ” Believer ”according to this law.
The plaintiff states in this lawsuit generally argue that the True Lender Rule “facilitates”[s] predatory lending “by effectively depriving states of the ability to impose their usury limits on consumer credit to borrowers in their jurisdictions. These usury lines should apply to most banking partnerships, as in most cases the non-banking partner would be labeled the “true lender” under the multi-factor tests they believe are more appropriate. States believe that many of these loan partnerships are “bogus rent-a-bank systems”.
These general arguments from the States are quite similar to these made by three states last year in their ongoing questioning of the “valid-when-made” rule of the OCC, which also aims to promote partnerships between banks and non-banks. Another group of eight states too demanded the appropriate “Valid-when” rule, applicable to Status-chartered banks issued by the FDIC. (The FDIC recently announced that it had no intention of enacting a “real lender” rule in relation to such banks.) The two “valid-when-created” rules stated that the interest rate on a bank Loan granted was valid at the time. If a bank grants a loan, this interest rate does not become invalid if the loan is later assigned to a non-bank institution.
In this week’s lawsuit, the plaintiffs’ specific allegation is that the True Lender Rule violates the Federal Administrative Procedure Act (“APA”) for the following reasons, among others: (1) The OCC rushed the rule, ignoring many of the 4,000 comments she received on the proposed rule; (2) the Bundesbank laws on which the OCC is based and which describe the powers of the national banks to grant loans do not authorize the OCC to determine who is the “real lender” in a credit partnership; (3) the brightline tests adopted by the OCC are inadequate in view of the different multi-factor tests used in case law; (4) the OCC anticipates “state consumer finance law”, which it cannot do without under the Dodd-Frank Act without following the standards now codified in 12 USC § 25b; and (5) the OCC, without explanation, is reversing a longstanding policy against “rent-a-bank” systems.
The OCC has many of these APA arguments in its Preamble to the final True Lender Rule issued in October last year. However, it is not entirely clear how the OCC will ultimately respond to this lawsuit, given the likelihood of a change in its leadership following the inauguration of President-elect Biden and the expressed dislike of some Democrats for these credit partnerships. We will continue to be on the lookout for developments in this and related areas of the law that affect banking partnerships with FinTech and other companies.