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Office of the Comptroller of the Currency Issues “True Lender” Rule

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While federal law permits national banks to transfer loans and assign mortgage loan contracts to third-party lenders, courts across the country have sometimes struggled, when loans are challenged in litigation, to determine which entity legally made the loan.   This ambiguity was problematic because national banks and third-party lenders are often subject to different laws, and the applicable law is determined by which entity is deemed to be the true lender.  Moreover, as the Office of the Comptroller of the Currency (OCC) noted, this ambiguity also discouraged banks from entering into lending contracts with third parties, thereby restricting competition and stifling innovation.  As a result, in late October 2020, the OCC issued a new rule intended to remedy the confusion and provide national banks and third-party lenders with the legal certainty necessary to enter into such agreements.  The rule goes into effect on December 29, 2020.

The new rule states that a bank makes a loan and is the true lender if, as of the date of origination, the bank funds the loan or the bank is named as the lender in the loan agreement.  See 12 C.F.R. § 7.1031.  Moreover, if a bank is named as the lender in the loan agreement, but another bank or third-party lender actually finances the loan, then the named bank is still deemed the true lender.

Critics of the rule argue that it does not do enough to prevent against “rent-a-charter” arrangements through which a third-party lender “rents” a national bank’s charter for a fee thereby enabling the third-party lender to avoid certain state usury limits.  The OCC denounced such arrangements, asserting that they have “absolutely no place in the federal banking system.”  The OCC further asserted that the rule effectively prevents such arrangements by holding national banks accountable for all of their loans, including those to third-party lenders.

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