We recently published a blog about the OCC’s proposed rule “National Banks and Federal Savings Associations as Lenders” (the “Proposed Rule”), which would clarify that a bank (or savings association) is properly regarded as the “true lender” when, as of the date of origination, it is named as the lender in a loan agreement or funds the loan. We also published a separate blog discussing a comment submitted to the OCC by Ballard Spahr in support of the Proposed Rule.
We have now reviewed a sampling of the numerous comments filed with respect to the Proposed Rule. Many strongly support the bright-line approach of the Proposed Rule; others are supportive but provide suggestions and request adjustments, others request added elements, and still others adamantly oppose the Proposed Rule, and in some cases, oppose any form of “true lender” rule.
The comment period for the Proposed Rule closed on September 3, 2020. The comments can be viewed on the Regulations.gov website, which is reporting the filing of over 700 comments on the Proposed Rule (with 548 having been posted as of the date of this blog). In contrast, “only” 63 comments were received last year on the OCC’s now final Valid-When-Made (“Madden-fix”) rule. The high number of comments on the new Proposed Rule likely is attributable in part to the submission of hundreds of identical or similar form comments and e-mails disparaging the Proposed Rule and in part, we think, to the greater importance of the “true lender” issue than the Madden issue, which is relatively easier to address through careful loan program structuring.
Comments supporting the Proposed Rule recognize that, coupled with the OCC’s recently adopted Madden-fix rule, it would eliminate confusion, uncertainty and legal risk for banks and their counterparties and increase financial inclusion and nationwide availability of credit on reasonable terms. They note the importance of access to credit at this time, particularly in the face of the economic crisis caused by COVID-19. Supporters point out the Proposed Rule would result in strong and consistent supervision of bank-fintech partnerships across the country, ensuring fairness and compliance with applicable laws, and note the Proposed Rule would keep the costs of credit down and encourage innovation.
The Independent Community Bankers of America, a trade association representing community banks, endorses the clear, unambiguous standard set forth in the Proposed Rule. Other supporters explained that the Proposed Rule would make better borrowing alternatives available to more consumers. For example, the Marketplace Lending Association, a trade association for banks and companies that cap rates at 36% per annum on their loans, wrote: “without access to affordable credit, consumers will be in danger of being ensnared in high cost or predatory debt traps.”
Supporting comments cite the OCC’s clear authority to adopt the Proposed Rule and the alignment of the Proposed Rule with the OCC’s congressionally established responsibilities to assure the safety and soundness of banks, compliance with laws and regulations, fair access to financial services, and fair treatment of customers by the institutions and other persons subject to its jurisdiction. The Receivables Management Association observed that the OCC is ideally situated to understand the nuances of the credit industry, and the importance of efficiency on the industry’s ability to provide affordable credit to fuel economic and job growth.
An academician at the Mercatus Center at George Mason University said “The OCC’s proposal is fair, is economically sound, and protects consumers, and the OCC should finalize it. In doing so, the OCC can help restore clarity and certainty to credit markets, strengthen banks’ ability to enter into partnerships, and improve access to credit to the benefit of banks, their nonbank partners, consumers, and society more broadly.”
While many comments supported the Proposed Rule without revision, other generally supportive comments suggested that elements should be added to the final rule or should be addressed in Supplementary Information. For example, the Marketplace Lending Association (“MLA”) “strongly supports” the proposal, believes it is an important compliment to the Madden-fix regulation and recognizes that Federal law does not give the OCC the authority to establish interest caps for particular types of loans. Still, the MLA proposes that the OCC should provide guidance to the effect that APRs above 36% constitute a “red flag” triggering scrutiny.
Avant, LLC, a fintech that recently settled the State of Colorado’s challenge to its lending program, expressed strong support for the “simple and straightforward” bright-line test proposed by the OCC. It noted that the Proposed Rule would eliminate the need for the fact-intensive multi-factor analyses that many courts have used to determine the true lender when applying a “predominant economic interest” test. According to Avant, this test can lead to myriad outcomes and continues to create uncertainty, thereby making credit unavailable to consumers who need it the most. However, Avant noted the recent settlement of the Colorado litigation and suggested it would be beneficial for the OCC to consider the “safe harbor” included in the Colorado settlement as it looks to further define bank partnership standards. According to Avant, this would promote credit availability while deterring abusive lending programs.
Cross River Bank, another settling party in the Colorado true lender litigation, also expressed the belief that the settlement’s framework can serve as a nationwide model to promote responsible access to affordable credit for those families most in need. While the Bank supports the OCC’s proposed criteria, it urges the OCC to develop a system that effectively weeds out predatory and abusive lending practices and proffers recommendations for criteria that should be added either in the rule or through supervisory standards.
Other comments, while generally supportive, express concerns about coverage or other issues.
We would characterize the reaction of some of the leading trade groups as lukewarm. The American Bankers Association supports the idea of the OCC making a “true lender” rule but thinks the Proposed Rule is too broad. It offers to work with the OCC and other agencies to create a better rule. The U.S. Chamber of Commerce supports the OCC’s efforts to remove ambiguity in the definition of a “true lender” but also thinks the suggested two-pronged test is too broad. It specifically asks the OCC to clarify that a “loan” does not include a retail installment contract and “funding” does not refer to warehouse funding. The Consumer Bankers Association supports the Proposed Rule but suggests additional considerations to add strength, and, like the Chamber, advocates carve-outs for indirect auto lending and mortgage warehouse lending. Likewise, the Mortgage Bankers Association generally supports the Proposed Rule but asks the OCC to add language to ensure warehouse lenders are not “true lenders.” By the same token, the American Financial Services Association said the OCC should clarify that “funding a loan” under the Proposed Rule excludes banks purchasing retail installment contracts (RICs) from automobile dealerships.
Many comments opposing the Proposed Rule were filed by banks, state authorities, special interest groups, academics and others. These comments reflected common themes, including assertions that: (1) the OCC lacks authority to adopt the Proposed Rule; (2) the Proposed Rule would deprive states of authority to regulate non-bank lenders; (3) the Proposed Rule would go beyond the preemption authority granted by the NBA; (4) the Proposed Rule is “arbitrary and capricious”; (5) the Proposed Rule’s adoption process violates the APA; (6) the Proposed Rule would support predatory lending and “rent-a-bank” schemes and therefore would be harmful to consumers and small businesses; and (7) the Proposed Rule might have an anti-competitive effect on other state-licensed non-bank lenders. Many comments advocated for positions beyond the scope of the Proposed Rule, proposing that the OCC adopt national consumer lending rate caps at 21% or 36%, or asking the OCC to reconsider the previously adopted Madden-fix rule.
A 78-page comment opposing the rule jointly submitted by the Center for Responsible Lending, the National Consumer Law Center and several others makes many of the same points these groups originally made in opposing the OCC’s Madden-fix rule. Likewise, an opposing comment submitted by Professor Adam Levitin restates many of the same arguments made in his earlier comment on the OCC’s Madden-fix Rule.
Unsurprisingly, the New York Department of Financial Services, which is participating in lawsuits attacking the OCC and FDIC Madden-fix rules, also submitted a comment opposing the Proposed Rule, saying the rule would sanction “rent-a-charter” schemes and would allow unregulated nonbank lenders to “exploit the bank’s ability to issue loans without regard to state usury caps” and “launder loans through banks as an end-run around consumer-protective state usury limits.” The comment includes a not-so-veiled litigation threat: “If the OCC acts outside the scope of its authority and finalizes this rule, NYDFS will take all appropriate steps necessary to protect consumers and small businesses in New York.”
Comments on the Proposed Rule submitted by members of Congress and State AGs predictably followed party lines. A letter highly critical of the Proposed Rule was signed by 24 of the 25 Democratic State AGs (all except the Delaware AG) – and no Republican AGs. The letter expressed the opinion that the OCC’s proposed bright-line true lender rule would enable increased predatory lending, payday lending and “rent-a-bank schemes.” The Democratic AGs also opine that the proposed two-pronged standard will produce contradictory results and that the OCC failed to comply with Dodd-Frank and the APA. These AGs ask that the Proposed Rule be withdrawn in its entirety.
Also, a letter opposing the Proposed Rule was sent two weeks after the close of the comment period by eight Democratic Senators (including Elizabeth Warren and six other members of the Senate Banking, Housing and Urban Affairs Committee). The letter criticizes the OCC for a “pre-financial crisis approach” in “broadly applying federal preemption to undermine state consumer protection laws.” It claims that the Proposed Rule does not meet the preemption requirements of Dodd-Frank and questions why the OCC has abandoned its Bush-era opposition to “rent-a-bank schemes”.
By contrast, all 26 House Financial Services Committee Republicans wrote the OCC and the FDIC in support of the rulemaking. This letter expresses concerns that “the uncertainty surrounding this issue … casts doubt on loans made under the bank-fintech partnership model and could reduce the availability of credit in affected areas, as was the case in states impacted by the Madden decision which deviated from valid when made.” The letter further states:
As you well know, third-party loan originations are subject to the same supervisory scrutiny as a bank-originated loan when there is a bank-fintech relationship…. [W]e believe the OCC and FDIC have the obligation and the necessary statutory authority to promulgate rules to clarify which entity is the “true lender” under the National Bank Act and the Federal Deposit Insurance Act, respectively. Clarity on this issue would be timely now that the valid when made question has been settled and would foster a robust, competitive, nationwide lending marketplace. The need for consumers and small businesses to have access to these lines of credit is only exacerbated by the COVID-19 pandemic and the associated economic slowdown.
We hope that the OCC will sift through the multitude of comments, identify constructive and helpful input, and move forward to finalize its Proposed Rule in a form that will enhance the ability of the industry to provide affordable credit to American consumers with appropriate protections and guidelines under the supervision of the OCC. Ultimately, however, the fate of the OCC true lender rule, like much in our lives, will probably depend on the outcome of the upcoming elections.
