The Office of the Comptroller of the Currency (“OCC”) has recently adopted one rule and proposed another that would clarify the OCC’s treatment of certain lending arrangements that involve both a national bank and a non-bank. In such an arrangement (colloquially known as a “rent-a-charter” model), a non-bank entity, often a FinTech platform, markets a lending product, interacts directly with and collects information from borrowers, and underwrites the resulting loans. The bank enters into the loan agreement with the borrower and funds the loan. After a contractually agreed period, the non-bank will then purchase the loan from the bank and thereafter will collect payments directly from the borrower.
Under the U.S. Supreme Court’s interpretation of Section 85 of the National Bank Act,1 a national bank may charge interest on loans it makes up to the usury limit of its home state, even if the borrower resides in a state with a lower usury limit – a practice known as “rate exportation.” The Depository Institutions Deregulation and Monetary Control Act of 1980 borrowed statutory language from Section 85 to extend the privilege of rate exportation to state-chartered banks. Rate exportation permits non-banks utilizing a “rent-a-charter” to effectively bypass state usury limits as long as a bank is the “true lender” and the non-bank is permitted to assume the loan after it is made.
Over recent years, prior to the OCC’s rulemakings, a series of court decisions had called into question the legal status of the “rent-a-charter” model. Most importantly, in 2015, the Second Circuit ruled in Madden v. Midland Financing that a non-bank that purchased charged-off loans from a national bank could not charge the same interest rate that the national bank is permitted to charge. The “true lender” issue was clouded by multiple court decisions applying fact-intensive multi-factor balancing tests.
Other federal regulators used the “true lender” doctrine to assert violations of federal consumer protection laws. The Consumer Financial Protection Bureau (“CFPB”) brought an enforcement action against CashCall in 2015 alleging that the non-bank CashCall was the “true lender” in its arrangement with a tribal lender and thus violated the Consumer Financial Protection Act in collecting payments on loans that exceeded several states’ usury limits.
On May 29, the OCC adopted what has been widely referred to in the industry as its “Madden-fix rule,” which permits non-banks that purchase loans originated by national banks to charge the same rate of interest as the national bank would be permitted to charge, even if that rate exceeds the usury limit applicable to the non-bank under applicable state law. Subsequently, on July 22, the OCC proposed a rule that would clarify that a national bank is the “true lender” when, as of the date of origination, the bank is either named as the lender in the loan agreement or funds the loan (or both).
The volume of litigation challenging “rent-a-charter” arrangements for violations of usury and consumer protection laws has been significant. Under the two new OCC rules, however (assuming the proposed rule is adopted substantially as proposed), a national bank would be considered the “true lender” and “export” its home state’s usury limit. After the loan was transferred to the non-bank, the non-bank could then continue charging interest at the same rate charged by the national bank, effectively bypassing any usury limits applicable to loans made by the non-bank.
Notably, the OCC’s rules do not address the viability of the “rent-a-charter” model when the charter being “rented” is a state charter. These rules are but one more example of the OCC moving independent from the other federal banking regulators in recent years, particularly on issues concerning FinTech companies.2
Comments on the OCC’s proposed rule are due September 3. We will continue to monitor developments related to “true lender” issues.