True Lender Issues: One Step Forward, Two Steps Back?

Abstract

The true lender rule issued by the Office of the Comptroller of the Currency (OCC) briefly provided a uniform standard that could be applied to determine when a national bank is acting as a lender when it partners with other service providers. The rule was lauded for its objective standard that respected the form of legal documentation. The fintech marketplace lending platforms and banks that have been doing business for years under a bank partnership model viewed the rule as a welcome sign that the OCC did not support state efforts to recast the marketplace lending platforms as the true lender as a way to impose state law usury rules against national banks. Then Congress invalidated the rule under the Congressional Review Act (CRA) within six months of its effective date. Did the bank partnership model take one step forward and two steps back? In this article, we explore “true lender” issues, existing litigation and regulatory developments, and the implications following the invalidation of the rule.

Key Findings

• ▪ If true lender arguments prevail and a nonbank is deemed the lender, federal preemption is inapplicable and state law limitations will apply, which in several states renders the loans unenforceable and requires repayments to the borrower.

• ▪ The invalidation of the true lender rule leaves market participants with the same lack of a uniform standard that existed before the rule and it creates uncertainty in what should be an efficient market for providing borrowers access to capital.

• ▪ We expect new legislation (e.g., recently enacted laws in Maine and Illinois) and new regulatory efforts aimed at finding that banks working with fintechs are not the true lenders and seeking to hold fintechs and their assignees liable for usury.