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Fintech in Brief: OCC Proposes ‘True Lender’ Rule for Bank Fintech Partnership Model

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On July 20, 2020, the Office of the Comptroller of the Currency (OCC) issued a Notice of Proposed Rulemaking (NPR) defining the “true lender” in bank partnerships with third party marketplace lenders. The NPR seeks comment on a proposed regulation that would determine when a national bank or federal thrift makes a loan and is the “true lender” in the context of a partnership between a bank and a third party. Fintechs engaging in consumer lending commonly rely on bank partnerships to offer credit on uniform terms on a nationwide basis. The relatively terse NPR provides that a bank makes a loan if, as of the date of origination, it either is named as the lender in the loan agreement or funds the loan.

The NPR follows the OCC’s recent adoption of its final rule on the “valid when made” doctrine (read more here). Both the true lender NPR and the final valid when made rule are intended to provide clarity and legal certainty to participants in bank partnerships or third party arrangements in the wake of federal and state litigation. The OCC is advancing the NPR because it believes that bank partnership lending relationships can be effective tools to facilitate affordable access to credit, but that there has been increasing uncertainty about the legal framework that applies to the loans made as part of these relationships. According to the OCC, “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.”

Consumer advocates are expected to be critical of the NPR as it and the earlier valid when made rule may lend themselves to abuse by predatory lenders entering into “rent a charter” arrangements with national banks and federal thrifts. Under federal law, OCC-regulated banks may export the interest rate of their home state notwithstanding another state’s usury limits. However, the OCC discounted concerns over potential abuse. The NPR Preamble notes that when a bank makes a loan, “a robust Federal framework applies” which ensures that lending is done in a safe and sound manner and in compliance with applicable prudential and consumer financial protection laws and regulations. The OCC also cited its role as a prudential regulator of the bank’s lending activities and the applicability of the OCC’s third party risk management guidance to the bank partnership relationship.

The NPR comment period ends on September 3, 2020.

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.

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