Never Ending True Lender Uncertainty

By Jeremy McLaughlin and John Reveal

On June 24, 2021, the U.S. House of Representatives passed a resolution to overturn the Office of the Comptroller of the Currency’s (“OCC”) “true lender” regulation that had been finalized on October 30, 2020. This resolution revives the uncertainty regarding the enforceability of loan terms when a national bank or federal savings association assigns loans to third parties.   President Biden is expected to sign the resolution. 

This saga began in 2015 when the Second Circuit Court of Appeals held in Madden v. Midland Funding that a national bank’s assignee was not permitted to charge the same interest rates permitted for the bank.  Uncertainty ensued, which the OCC had attempted to resolve through two related regulations.  It first issued a “valid when made” regulation in June 2020 stating that interest on a loan that is permissible under federal law applicable to national banks and federal savings association “shall not be affected by the sale, assignment, or other transfer of the loan.”  In a second regulation in October 2020, the OCC answered the question of how to determine the “true lender” for a loan, and thus determine permissible rates of interest. This regulation provided that a national bank or federal savings association is the entity making any loan (i.e., the true lender) if, as of the date of its origination, the bank or association funded the loan or is named as the lender in the loan agreement.  If one bank is named as the lender but another bank funded the loan, then the bank named as the lender in the loan agreement would have been considered to have made the loan. 

Although the Congressional resolution overruled only the OCC’s true lender regulation, it also seems to render useless the valid when made regulation.  The valid when made regulation will apply only if a national bank or savings association is the true lender, and we are once again left without clear true lender standards.  Because of this uncertainty at the federal level,  we might see states step in to fill some of the void by  outlining the circumstances in which a bank or savings association will be considered the true lender for state lender licensing and usury purposes. 

One state to have do so already is Colorado.  The Colorado Attorney General had alleged that certain non-bank parties were the true lenders, rather than the banks that originated the loans, because those non-banks held the predominate economic interest in the laws.  That meant that the interest rate authority applicable to the banks did not apply and so the non-banks were confined to  the more restrictive interest rate laws applicable to them.  The Colorado Attorney General ultimately entered into a settlement with the parties that set forth the conditions under which the banks could be treated as the true lenders, but also required the non-bank lenders to obtain lending licenses.  This settlement might serve as a model for legislation in other states, which would at least provide certainty to the industry.