National Banks and Federal Savings Associations as Lenders

Published date30 October 2020
Citation85 FR 68742
Record Number2020-24134
SectionRules and Regulations
CourtThe Comptroller Of The Currency Office
Federal Register, Volume 85 Issue 211 (Friday, October 30, 2020)
[Federal Register Volume 85, Number 211 (Friday, October 30, 2020)]
                [Rules and Regulations]
                [Pages 68742-68747]
                From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
                [FR Doc No: 2020-24134]
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                DEPARTMENT OF THE TREASURY
                Office of the Comptroller of the Currency
                12 CFR Part 7
                [Docket ID OCC-2020-0026]
                RIN 1557-AE97
                National Banks and Federal Savings Associations as Lenders
                AGENCY: Office of the Comptroller of the Currency, Treasury.
                ACTION: Final rule.
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                SUMMARY: The Office of the Comptroller of the Currency (OCC) is issuing
                this final rule to determine when a national bank or Federal savings
                association (bank) makes a loan and is the ``true lender,'' including
                in the context of a partnership between a bank and a third party, such
                as a marketplace lender. Under this rule, a bank makes a loan if, as of
                the date of origination, it is named as the lender in the loan
                agreement or funds the loan.
                DATES: The final rule is effective on December 29, 2020.
                FOR FURTHER INFORMATION CONTACT: Andra Shuster, Senior Counsel, Karen
                McSweeney, Special Counsel, Alison MacDonald, Special Counsel, or
                Priscilla Benner, Senior Attorney, Chief Counsel's Office, (202) 649-
                5490, Office of the Comptroller of the Currency, 400 7th Street SW,
                Washington, DC 20219. For persons who are deaf or hearing impaired, TTY
                users may contact (202) 649-5597.
                SUPPLEMENTARY INFORMATION:
                I. Background
                 Lending partnerships between national banks or Federal savings
                associations (banks) and third parties play a critical role in our
                financial system.\1\ These partnerships expand access to credit and
                provide an avenue for banks to remain competitive as the financial
                sector evolves. Through these partnerships, banks often leverage
                technology developed by innovative third parties that helps to reach a
                wider array of customers. However, there is often uncertainty about how
                to determine which entity is making the loans and, therefore, the laws
                that apply to these loans.\2\ This uncertainty may discourage banks
                from entering into lending partnerships, which, in turn, may limit
                competition, restrict access to affordable credit, and chill the
                innovation that can result from these relationships. Through this
                rulemaking, the Office of the Comptroller of the Currency (OCC) is
                providing the legal certainty necessary for banks to partner
                confidently with other market participants and meet the credit needs of
                their customers.
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                 \1\ In this rulemaking, use of the terms ``partner'' or
                ``partnership'' does not connote any specific legal relationship
                between a bank and a third party, and the terms ``partnership'' and
                ``relationship'' are used interchangeably to describe a variety of
                relationships between banks and third parties.
                 \2\ This is often referred to as a question of which entity is
                the `true lender.'
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                 However, the OCC understands that there is concern that its
                rulemaking facilitates inappropriate `rent-a-charter' lending schemes--
                arrangements in which a bank receives a fee to `rent' its charter and
                unique legal status to a third party. These schemes are designed to
                enable the third party to evade state and local laws, including some
                state consumer protection laws, and to allow the bank to disclaim any
                compliance responsibility for the loans. These arrangements have
                absolutely no place in the federal banking system and are addressed by
                this rulemaking, which holds banks accountable for all loans they make,
                including those made in the context of marketplace lending partnerships
                or other loan sale arrangements.
                 On July 22, 2020, the OCC published a notice of proposed rulemaking
                (proposal or NPR) to determine when a bank makes a loan.\3\ Under the
                proposal, a bank made a loan if, as of the date of origination, it (1)
                was named as the lender in the loan agreement or (2) funded the loan.
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                 \3\ 85 FR 44223.
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                 As the proposal explained, federal law authorizes banks to enter
                into contracts, to make loans, and to subsequently transfer these loans
                and assign the loan contracts.\4\ The statutory framework, however,
                does not specifically address which entity makes a loan when the loan
                is originated as part of a lending partnership involving a bank and a
                third party, nor has the OCC taken regulatory action to resolve this
                ambiguity. In the absence of regulatory action, a growing body of case
                law has introduced divergent standards for resolving this issue, as
                discussed below. As a result of this legal uncertainty, stakeholders
                cannot reliably determine the applicability of key laws, including the
                law governing the permissible interest that may be charged on the loan.
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                 \4\ See 12 U.S.C. 24(Third), 24(Seventh), 371, 1464; see also 12
                CFR 7.4008, 34.3, 160.30.
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                 This final rule establishes a clear test for determining when a
                bank makes a loan, by interpreting the statutes that grant banks their
                authority to lend. Specifically, the final rule provides that a bank
                makes a loan when it, as of the date of origination, (1) is named as
                the lender in the loan agreement or (2) funds the loan.
                II. Overview of Comments
                 The OCC received approximately 4,000 comments on the proposal, the
                vast majority of which were from individuals using a version of one of
                three short form letters to express opposition to the proposal. Other
                commenters included banks, nonbank lenders, industry trade
                associations, community groups, academics, state government
                representatives, and members of Congress.
                 Commenters supporting the proposal stated that the judicial true
                lender doctrine has led to divergent standards and uncertainty
                concerning the legitimacy of lending partnerships between banks and
                third parties. They also stated that, by removing the uncertainty, the
                OCC would help ensure that banks have the confidence to enter into
                these lending relationships, which provide affordable credit to
                consumers on more favorable terms than the alternatives, such as pawn
                shops or payday lenders, to which underserved communities often turn.
                Supporting commenters also observed that the proposal would enhance a
                bank's safety and soundness by facilitating its ability to sell loans.
                These commenters also noted that the proposal (1) makes clear that the
                OCC will hold banks accountable for products with unfair, deceptive,
                abusive, or misleading features that are offered as part of a
                relationship and (2) is consistent with the OCC's statutory mission to
                ensure that banks provide fair access to financial services.
                 Commenters opposing the proposal stated that it would facilitate
                so-called rent-a-charter schemes, which would
                [[Page 68743]]
                result in increased predatory lending and disproportionately impact
                marginalized communities. Other opposing commenters stated that the
                proposal is an attempt by the OCC to improperly regulate nonbank
                lenders, a role they consider to be reserved exclusively to the states.
                Opposing commenters also asserted that the OCC did not have sufficient
                legal authority to issue the proposal and that the proposal violated
                the Administrative Procedure Act (APA) and 12 U.S.C. 25b.
                 Both supporting and opposing commenters recommended changes. These
                recommendations included (1) adopting a test that requires the true
                lender to have a predominant economic interest in the loan; (2)
                providing additional ``safe harbor'' requirements to enhance consumer
                protections (e.g., interest rate caps); (3) clarifying that certain
                traditional bank lending activities do not fall under the funding prong
                of the rule (e.g., indirect auto lending and mortgage warehouse
                lending); (4) providing additional details on how the OCC would
                supervise these relationships; and (5) stating that the rule will not
                displace certain federal consumer protection laws and regulations.
                 The comments are addressed in greater detail below.
                III. Analysis
                 As noted in the prior section, commenters raised a variety of
                issues for the OCC's consideration. These are discussed below.
                A. OCC's Authority To Issue the Rule
                 Some commenters argued the OCC lacks the legal authority to issue
                the rule because it would contravene the unambiguous meaning of 12
                U.S.C. 85. These commenters believe that section 85 incorporates the
                common law of usury as of 1864, which they view as requiring courts to
                look to the substance rather than the form of a transaction. In a
                similar vein, commenters argued that section 85 incorporates all usury
                laws of a state, including its true lender jurisprudence. One commenter
                also argued that the proposal contradicts judicial and administrative
                precedent interpreting sections 85 and 86.
                 The OCC disagrees. The rule interprets statutes that authorize
                banks to lend--12 U.S.C. 24, 371, and 1464(c)--and clarifies how to
                determine when a bank exercises this lending authority. The OCC has
                clear authority to reasonably interpret these statutes, which do not
                specifically address when a bank makes a loan.\5\
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                 \5\ See Chevron U.S.A., Inc. v. Nat. Res. Def. Council, Inc.,
                467 U.S. 837, 843 (1984) (``[I]f the statute is silent or ambiguous
                with respect to the specific issue, the question for the court is
                whether the agency's answer is based on a permissible construction
                of the statute.''); see also National Cable & Telecommunications
                Assoc., et al., v. Brand X internet Services et al., 545 U.S. 967
                (2005); Gutierrez-Brizuela v. Lynch, 834 F.3d 1142 (10th Cir. 2016).
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                 Banks do not obtain their lending authority from section 85 or 12
                U.S.C. 1463(g). Nor are these statutes the authority the OCC is relying
                on to issue this rule. The proposal referenced sections 85 and 1463(g)
                in the regulatory text to ensure that interested parties understand the
                consequences of its interpretation of sections 24, 371, and 1464(c),\6\
                including that this rulemaking operates together with the OCC's
                recently finalized `Madden-fix' rulemaking.\7\ When a bank makes a loan
                pursuant to the test established in this regulation, the bank may
                subsequently sell, assign, or otherwise transfer the loan without
                affecting the permissible interest term, which is determined by
                reference to state law.\8\
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                 \6\ Although this rulemaking is not an interpretation of either
                section 85 or 1463(g), the OCC has clear authority to interpret
                these statutes, including as a basis for this rulemaking. See Smiley
                v. Citibank (S.D.), N.A., 517 U.S. 735 (1996) (Smiley) (deferring to
                the OCC's reasonable interpretation of section 85's ambiguity with
                respect to meaning of ``interest''). Section 1463(g) is interpreted
                in pari materia to section 85. See Gavey Props./762 v. First Fin.
                Sav. & Loan Ass'n, 845 F.2d 519, 521 (5th Cir. 1988) (``Given the
                similarity of language, the conclusion is virtually compelled that
                Congress sought to provide federally insured credit institutions
                with the same `most favored lender' status enjoyed by national
                banks.''); 61 FR 50951, 50968 (Sept. 30, 1996) (``OTS and its
                predecessor, the FHLBB, have long looked to the OCC regulation and
                other precedent interpreting the national bank most favored lender
                provision for guidance in interpreting [12 U.S.C. 1463(g)] and OTS's
                implementing regulation.''); OTS letter from Harris Weinstein,
                December 24, 1992, 1992 WL 12005275.
                 \7\ Permissible Interest on Loans That Are Sold, Assigned, or
                Otherwise Transferred, 85 FR 33530 (June 2, 2020).
                 \8\ 12 CFR 7.4001(e) and 160.110(d).
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                 Other commenters questioned the OCC's authority on different
                grounds. Some asserted the OCC lacks authority to (1) exempt nonbanks
                from compliance with state law or (2) preempt state laws that determine
                whether a loan is made by a nonbank lender. One commenter also asserted
                that the proposal is an attempt by the OCC to interpret state law. A
                commenter further argued that the OCC's statutory interpretation is not
                reasonable, including because the proposal (1) would allow nonbanks to
                enjoy the benefits of federal preemption without submitting to any
                regulatory oversight and (2) violates the presumption against
                preemption, especially in an area of historical state police powers
                like consumer protection.
                 This rulemaking does not assert authority over nonbanks, preempt
                state laws applicable to nonbank lenders, or interpret state law. It
                interprets federal banking law and has no direct applicability to any
                nonbank entity or activity. Rather, in identifying the true lender, the
                rule pinpoints key elements of the statutory, regulatory, and
                supervisory framework applicable to the loan in question. As noted in
                the proposal, if a nonbank partner is the true lender, the relevant
                state (and not OCC) would regulate the lending activity, and the OCC
                would assess the bank's third-party risk management in connection with
                the relationship itself.
                 Furthermore, because commenters expressed concern that this rule
                would undermine state usury caps, it is also important to emphasize
                that sections 85 and 1463(g) provide a choice of law framework for
                determining which state's law applies to bank loans and, in this way,
                incorporate, rather than eliminate, state law. These statutes require
                that a bank refer to, and comply with, the usury cap established by the
                laws of the state where the bank is located. Thus, disparities between
                the usury caps applicable to particular bank loans result primarily
                from differences in the state laws that impose these caps, not from an
                interpretation that section 85 or 1463(g) preempt state law.
                 A commenter also asserted that the OCC's interpretation is not
                reasonable because it (1) does not solve the problem it claims to
                remedy, arguing that the proposal itself is unclear and requires banks
                to undertake a fact-specific analysis and (2) departs from federal
                cases holding that state true lender law applies to lending
                relationships between banks and nonbanks.
                 The OCC believes that this rule provides a simple, bright-line test
                to determine when a bank has made a loan and, therefore, is the true
                lender in a lending relationship. The only required factual analysis is
                whether the bank is named as the lender or funds the loan. The OCC has
                evaluated various standards established by courts and has determined
                that a clear, predictable, and easily administrable test is preferable.
                This test will provide legal certainty, and the OCC's robust
                supervisory framework effectively targets predatory lending, achieving
                the same goal as a more complex true lender test.
                 Several commenters also asserted that the proposal contravenes 12
                U.S.C. 1, which charges the OCC with ensuring that banks treat
                customers fairly. One
                [[Page 68744]]
                commenter also argued that the proposal is inconsistent with the
                Community Reinvestment Act (CRA) because it encourages predatory
                lending. As the OCC explained in the proposal, the rule's purpose is to
                provide legal certainty to expand access to credit, a goal that is
                entirely consistent with the agency's statutory charge to ensure fair
                treatment of customers and banks' statutory obligation to serve the
                convenience and needs of their communities.
                B. 12 U.S.C. 25b
                 Several commenters asserted that the agency should have complied
                with 12 U.S.C. 25b, which applies when the OCC issues a regulation or
                order that preempts a state consumer financial law. Some of these
                commenters argued that the proposal fails to meet the preemption
                standard articulated in Barnett Bank of Marion County, N.A. v. Nelson,
                Florida Insurance Commissioner, et al. (Barnett),\9\ as incorporated
                into section 25b. Commenters also argued that (1) section 25b(f) does
                not exempt the OCC's proposal from the requirements of section 25b
                because the rule is not limited to banks charging interest and (2) the
                proposal undermines or contravenes section 25b(h) because it extends
                preemptive treatment to subsidiaries, affiliates, and agents of banks.
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                 \9\ 517 U.S. 25 (1996).
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                 The OCC disagrees: The requirements of section 25b are inapplicable
                to this rulemaking. Section 25b applies when the Comptroller
                determines, on a case-by-case basis, that a state consumer financial
                law is preempted pursuant to the standard for conflict preemption
                established by the Supreme Court in Barnett, i.e., when the Comptroller
                makes a preemption determination.\10\ This rulemaking does not preempt
                a state consumer financial law but rather interprets a bank's federal
                authority to lend. Furthermore, commenters arguing that section 25b(f)
                (which addresses section 85) does not exempt this rulemaking from the
                procedures in section 25b and that sections 25b(b)(2), (e), and (h)(2)
                (which address bank subsidiaries, affiliates, and agents) preclude the
                agency from issuing this rule are mistaken; this rulemaking is not an
                interpretation of section 85, nor does it address the applicability of
                state law to bank subsidiaries, affiliates, or agents.
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                 \10\ Twelve U.S.C. 25b(b) also provides (1) a state consumer
                financial law is preempted if it has a discriminatory effect on
                national banks, in comparison with the effect of the law on a bank
                chartered by that state or (2) a state consumer financial law may be
                preempted by a provision of federal law other than title 62 of the
                Revised Statutes. See 12 U.S.C. 25b(b)(1)(A) and (b)(1)(C),
                respectively.
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                C. Administrative Procedure Act
                 Several commenters asserted that, for various reasons, the proposal
                is arbitrary and capricious and, therefore, in violation of the APA.
                Some commenters argued that the proposal lacks an evidentiary basis,
                either entirely or with respect to certain assertions, such as the
                existence of legal uncertainty. The OCC disagrees. The APA's arbitrary
                and capricious standard requires an agency to make rational and
                informed decisions based on the information before it.\11\ Furthermore,
                the standard does not require the OCC to develop or cite empirical or
                other data to support its rule or wait for problems to materialize
                before acting.\12\ Instead, the OCC may rely on its expertise to
                address the problems that may arise.\13\
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                 \11\ Ass'n of Private Colls. & Univs. v. Duncan, 870 F. Supp. 2d
                133, 154 (D.D.C. 2012); see Motor Vehicle Mfrs. Ass'n of U.S., Inc.
                v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 52 (1983) (``The
                agency must explain the evidence which is available, and must offer
                a `rational connection between the facts found and the choice made.'
                '' (quoting Burlington Truck Lines, Inc. v. United States, 371 U.S.
                156, 168 (1962))).
                 \12\ Stilwell v. Office of Thrift Supervision, 569 F.3d 514, 519
                (D.C. Cir. 2009) (``The APA imposes no general obligation on
                agencies to produce empirical evidence. . . . Moreover, agencies
                can, of course, adopt prophylactic rules to prevent potential
                problems before they arise. . . . OTS based its proposal on its long
                experience of supervising mutual savings associations; its view
                found support in various comments submitted in response to the
                proposal.''); Chamber of Commerce of U.S. v. SEC, 412 F.3d 133, 142
                (D.C. Cir. 2005) (holding that the SEC did not have to conduct an
                empirical study in support of its rulemaking where it based its
                decision on ``its own and its staff's experience, the many comments
                received, and other evidence, in addition to the limited and
                conflicting empirical evidence'').
                 \13\ FCC v. WNCN Listeners Guild, 450 U.S. 582, 595-96 (1981)
                (granting deference to the agency's ``forecast of the direction in
                which future public interest lies''); U.S. Telecom Ass'n v. FCC, 825
                F.3d 674, 732 (D.C. Cir. 2016) (``[A]n agency's predictive judgments
                about areas that are within the agency's field of discretion and
                expertise are entitled to particularly deferential review, as long
                as they are reasonable.'' (emphasis in original) (quoting EarthLink,
                Inc. v. FCC, 462 F.3d 1, 12 (D.C. Cir. 2006)).
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                 The OCC has decided to issue this rule to resolve the effects of
                legal uncertainty on banks and their third-party relationships. In this
                case, the OCC's views are informed by courts' divergent true lender
                tests and the resulting lack of predictability faced by
                stakeholders.\14\ While the OCC understands its rule may not resolve
                all legal uncertainty for every loan, this is not a prerequisite for
                the agency to take this narrowly tailored action.\15\ Taking these
                considerations into account, the OCC has made a rational and informed
                decision to issue this rule.
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                 \14\ As explained in the proposal, in some cases, the court has
                concluded that the form of the transaction alone resolves this
                issue. In other cases, the courts have applied fact-intensive
                balancing tests, in which they have considered a multitude of
                factors. However, no factor is dispositive, nor are the factors
                assessed based on any predictable, bright-line standard. Even when
                nominally engaged in the same analysis--determining which entity has
                the ``predominant economic interest'' in the transaction--courts do
                not necessarily consider all of the same factors or give each factor
                the same weight. See 85 FR at 44224, n.8-15 and accompanying
                discussion. The comments the agency received from industry
                representatives further evidence this uncertainty.
                 \15\ See Taylor v. Fed. Aviation Admin., 895 F.3d 56, 68 (2018);
                cf. Smiley, 517 U.S. at 743 (stating ``that there was good reason
                for the Comptroller to promulgate the new regulation, in order to
                eliminate uncertainty and confusion'').
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                 Commenters also argued that the OCC's actions violate the APA
                because the agency has not given notice of its intention to reverse an
                existing policy or provided the factual, legal, and policy reasons for
                doing so. Specifically, these commenters referenced the OCC's
                longstanding policy prohibiting banks from entering into rent-a-charter
                schemes. This rulemaking does not reverse the OCC's position. The OCC's
                longstanding and unwavering opposition to predatory lending, including
                but not limited to predatory lending as part of a third-party
                relationship, remains intact and strong.\16\ In fact, this rulemaking
                would solve the rent-a-charter issues raised and ensure that banks do
                not participate in those arrangements. As noted in the proposal, the
                OCC's statutes and regulations, enforceable guidelines, guidance, and
                enforcement authority provide robust and effective safeguards against
                predatory lending when a bank exercises its lending authority. This
                rule does not alter this framework but rather reinforces its importance
                by clarifying that it applies to every loan a bank makes and by
                providing a simple test to identify precisely when a bank has made a
                loan. If a bank fails to satisfy its compliance obligations, the OCC
                will not hesitate to use its enforcement authority consistent with its
                longstanding policy and practice.
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                 \16\ Commenters also asserted that this rulemaking is
                inconsistent with OCC Interpretive Letter 1002 (May 13, 2004) (IL
                1002), which specifically recognized the relationship between the
                entity that makes a loan and the applicable legal framework. While
                IL 1002 provides examples of how to determine which party makes a
                loan (e.g., the party that funded the loan), it did not purport to
                establish a determinative true lender test. By establishing such a
                test, this rulemaking complements IL 1002 and does not represent a
                reversal of an agency position.
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                 Furthermore, the final rule does not change the OCC's expectation
                that all banks establish and maintain prudent credit underwriting
                practices and
                [[Page 68745]]
                comply with applicable law, even when they partner with third parties.
                These expectations were in place before the OCC issued its proposal and
                will remain in place after the final rule takes effect. For these
                reasons, the final rule does not represent a change in OCC policy.
                D. Comments on the Proposed Regulatory Text
                 As noted previously, the OCC's proposed regulatory text set out a
                test for determining when a bank has made a loan for purposes of 12
                U.S.C. 24, 85, 371, 1463(g), and 1464(c). Under this test, a bank made
                a loan if, as of the date of origination, it was named as the lender in
                the loan agreement or funded the loan.
                 Some commenters supported the rule without change, stating that the
                proposal provided the clarity needed to determine which entity is the
                true lender in a lending relationship. Other commenters supported the
                proposal as a general matter but suggested specific changes, including
                clarifying that the funding prong does not include certain lending or
                financing arrangements such as warehouse lending, indirect auto lending
                (through bank purchases of retail installment contracts (RICs)), loan
                syndication, and other structured finance.
                 These commenters are correct that the funding prong of the proposal
                generally does not include these types of arrangements: They do not
                involve a bank funding a loan at the time of origination. For example,
                when a bank purchases a RIC from an auto dealer, as is often the case
                with indirect auto lending, the bank does not ``fund'' the loan.\17\
                When a bank provides a warehouse loan to a third party that
                subsequently draws on that warehouse loan to lend to other borrowers,
                the bank is not funding the loans to these other borrowers. In
                contrast, and as noted in the proposal, the bank is the true lender in
                a table funding arrangement when the bank funds the loan at
                origination.\18\
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                 \17\ Two commenters requested that the OCC clarify that
                references to a ``loan'' apply solely to finance arrangements that
                involve a loan of money, such as have been the subject of the bank-
                nonbank partnership arrangements prompting the proposal, and not to
                time price sales entered into by retail sellers regulated under
                applicable state sales finance laws (e.g., RICs). We agree--the rule
                is intended to apply to loans of money by banks and not to retail
                sales of goods under RICs.
                 \18\ Although the OCC is confident that its rule provides a
                clear and simple test for determining who is the true lender, the
                agency recognizes that, on occasion, there may be additional
                circumstances in which its application is unclear. In these
                circumstances, banks with questions should contact the OCC.
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                 Another commenter recommended that the OCC consider the ``safe
                harbor'' established in the recent settlement between the Colorado
                Attorney General and several financial institutions and fintech
                lenders.\19\ While we are aware of this settlement, the OCC believes
                that our approach achieves the goal of legal certainty while providing
                the necessary safeguards.
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                 \19\ Assurance of Discontinuance, In re Avant of Colorado, LLC
                and Marlette Funding, LLC (Aug. 7, 2020), available at https://coag.gov/app/uploads/2020/08/Avant-Marlette-Colorado-Fully-Executed-AOD.pdf.
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                 One commenter requested that the OCC expressly state in the final
                rule that the rulemaking is not intended to displace or alter other
                regulatory regimes, including those that address consumer protection.
                Another commenter requested that the OCC clarify how account
                information in true lender arrangements should be reported to consumer
                reporting agencies under the Fair Credit Reporting Act. As the preamble
                to the proposal noted, the OCC's rule does not affect the application
                of any federal consumer financial laws, including, but not limited to,
                the meaning of the terms (1) ``creditor'' in the Truth in Lending Act
                (15 U.S.C. 1601 et seq.) and Regulation Z (12 CFR part 1026) and (2)
                ``lender'' in Regulation X (12 CFR part 1024), which implements the
                Real Estate Settlement Procedures Act of 1974 (12 U.S.C. 2601 et seq.).
                Similarly, the OCC's rule does not affect the applicability of the Home
                Mortgage Disclosure Act (12 U.S.C. 2801 et seq.), the Equal Credit
                Opportunity Act (15 U.S.C. 1691 et seq.), the Fair Credit Reporting Act
                (15 U.S.C. 1681 et seq.), or their implementing regulations (Regulation
                C (12 CFR part 1003), Regulation B (12 CFR part 1002), and Regulation V
                (12 CFR part 1022)), respectively. The OCC recommends that commenters
                direct questions regarding these statutes and regulations to the
                Consumer Financial Protection Bureau.
                 Some commenters stated that the two prongs in the proposal's test
                would produce contradictory and absurd results. For example, several
                commenters noted that, under the proposal, two banks could be the true
                lender (e.g., at origination, one bank is named as the lender on the
                loan agreement and another bank funds the loan). In response to this
                comment, we have amended the regulatory text to provide that where one
                bank is named as the lender in the loan agreement and another bank
                funds the loan, the bank named as the lender in the loan agreement
                makes the loan. This approach will provide additional clarity and allow
                stakeholders, including borrowers, to easily identify the bank that
                makes the loan. Otherwise, the OCC adopts the regulatory text as
                proposed.
                E. Rent-a-Charter Concerns; Supervisory Expectations
                 The OCC received multiple comments expressing concern that the
                proposal would facilitate rent-a-charter relationships and thereby
                enable nonbank lenders to engage in predatory or otherwise abusive
                lending practices. These commenters noted that nonbanks are generally
                not subject to the type of prudential supervision that applies to banks
                and that usury caps are the most effective method to curb predatory
                lending by nonbanks. They argued that the OCC's rule would effectively
                nullify these caps and facilitate the expansion of predatory lending.
                 As explained above, in a rent-a-charter arrangement, a lender
                receives a fee to rent out its charter and unique legal status to
                originate loans on behalf of a third party, enabling the third party to
                evade state and local laws, such as usury caps and other consumer
                protection laws. At the same time, the lender disclaims any
                responsibility for these loans. As a result of these arrangements,
                consumers can find themselves in debt to an unscrupulous nonbank lender
                that is subject to very little or no prudential supervision on a loan
                at an interest rate grossly in excess of the state usury cap.
                 The OCC agrees that rent-a-charter schemes have no place in the
                federal financial system but disagrees that this rule facilitates such
                schemes. As noted above, instead, this proposal would help solve the
                problem by (1) providing a clear and simple test for determining when a
                bank makes a loan and (2) emphasizing the robust supervisory framework
                that applies to any loan made by a bank and to all third-party
                relationships to which banks are a party. As noted above, if a bank
                fails to satisfy its obligations under this supervisory framework, the
                OCC will use all the tools at its disposal, including its enforcement
                authority.\20\
                ---------------------------------------------------------------------------
                 \20\ Depending on the structure of the bank and the activities
                it conducts, other regulators may have oversight roles as well. For
                example, the Consumer Financial Protection Bureau has exclusive
                supervisory authority and primary enforcement authority for federal
                consumer financial laws for banks that are insured depository
                institutions and have assets greater than $10 billion. See 12 U.S.C.
                5515. The OCC generally has exclusive supervisory and enforcement
                authority for banks with assets of $10 billion or less. See 12
                U.S.C. 5516, 5581(c)(1)(B).
                ---------------------------------------------------------------------------
                 Although the proposal discussed this supervisory framework in
                detail, it bears repeating because of its importance to
                [[Page 68746]]
                this rulemaking. Every bank is responsible for establishing and
                maintaining prudent credit underwriting practices that: (1) Are
                commensurate with the types of loans the bank will make and consider
                the terms and conditions under which they will be made; (2) consider
                the nature of the markets in which the loans will be made; (3) provide
                for consideration, prior to credit commitment, of the borrower's
                overall financial condition and resources, the financial responsibility
                of any guarantor, the nature and value of any underlying collateral,
                and the borrower's character and willingness to repay as agreed; (4)
                establish a system of independent, ongoing credit review and
                appropriate communication to management and to the board of directors;
                (5) take adequate account of concentration of credit risk; and (6) are
                appropriate to the size of the institution and the nature and scope of
                its activities.\21\ Moreover, every bank is expected to have loan
                documentation practices that: (1) Enable the institution to make an
                informed lending decision and assess risk, as necessary, on an ongoing
                basis; (2) identify the purpose of a loan and the source of repayment
                and assess the ability of the borrower to repay the indebtedness in a
                timely manner; (3) ensure that any claim against a borrower is legally
                enforceable; (4) demonstrate appropriate administration and monitoring
                of a loan; and (5) take account of the size and complexity of a
                loan.\22\ Every bank should also have appropriate internal controls and
                information systems to assess and manage the risks associated with its
                lending activities, including those that provide for monitoring
                adherence to established policies and compliance with applicable laws
                and regulations, as well as internal audit systems.\23\
                ---------------------------------------------------------------------------
                 \21\ 12 CFR part 30, appendix A, II.D; see 12 CFR part 34,
                appendix A to subpart D.
                 \22\ 12 CFR part 30, appendix A, II.C.
                 \23\ 12 CFR part 30, appendix A, II.A and II.B.
                ---------------------------------------------------------------------------
                 In addition, a bank's lending must comply with all applicable laws
                and regulations, including federal consumer protection laws. For
                example, section 5 of the Federal Trade Commission Act (FTC Act)
                provides that ``unfair or deceptive acts or practices in or affecting
                commerce'' are unlawful.\24\ The Dodd-Frank Wall Street Reform and
                Consumer Protection Act also prohibits unfair, deceptive, or
                ``abusive'' acts or practices.\25\ The OCC has taken a number of public
                enforcement actions against banks for violating section 5 of the FTC
                Act and will continue to exercise its enforcement authority to address
                unlawful actions.\26\
                ---------------------------------------------------------------------------
                 \24\ 15 U.S.C. 45; see also 12 CFR 7.4008(c), 34.3(c), part 30,
                appendix C. Further, OCC guidance directly addresses unfair or
                deceptive acts or practices with respect to banks. See OCC Advisory
                Letter 2002-3, ``Guidance on Unfair or Deceptive Acts or Practices''
                (Mar. 22, 2002); OCC Advisory Letter 2003-2, ``Guidelines for
                National Banks to Guard Against Predatory and Abusive Lending
                Practices'' (Feb. 21, 2003); OCC Advisory Letter 2003-3, ``Avoiding
                Predatory and Abusive Lending Practices in Brokered and Purchased
                Loans'' (Feb. 21, 2003); and OCC Bulletin 2014-37, ``Risk Management
                Guidance: Consumer Debt Sales'' (Aug. 4, 2014).
                 \25\ Public Law 111-203, tit. X, sections 1031 and 1036, 124
                Stat. 2005, 2010 (codified at 12 U.S.C. 5531 and 5536). The OCC
                recently issued a new booklet of the Comptroller's Handbook to
                provide guidance to examiners about the risks of banks and third
                parties engaging in lending, marketing, or other practices that may
                constitute unfair or deceptive acts or practices or unfair,
                deceptive, or abusive acts or practices. See Comptroller's Handbook,
                ``Consumer Compliance, Unfair or Deceptive Acts or Practices and
                Unfair, Deceptive, or Abusive Acts or Practices'' (June 2020).
                 \26\ See 12 U.S.C. 1818(b).
                ---------------------------------------------------------------------------
                 Banks also are subject to federal fair lending laws and may not
                engage in unlawful discrimination, such as ``steering'' a borrower to a
                higher cost loan on the basis of the borrower's race, national origin,
                age, or gender. If a bank engages in any unlawful discriminatory
                practices, the OCC will take appropriate action under the federal fair
                lending laws.\27\ Further, under the CRA regulations, CRA-related
                lending practices that violate federal fair lending laws, the FTC Act,
                or Home Ownership and Equity Protection Act, or that evidence other
                discriminatory or illegal credit practices, can adversely affect a
                bank's CRA performance rating.\28\
                ---------------------------------------------------------------------------
                 \27\ See 15 U.S.C. 1691; 42 U.S.C. 3601 et seq. As noted above,
                supra note 20, other regulators may have oversight roles as well and
                can be expected to take appropriate enforcement action to address
                unlawful action within their jurisdiction.
                 \28\ See 12 CFR 25.17; 12 CFR part 25, appendix C, 12 CFR
                25.28(c).
                ---------------------------------------------------------------------------
                 The OCC has also taken significant steps to eliminate predatory,
                unfair, or deceptive practices in the federal banking system,
                recognizing that ``[s]uch practices are inconsistent with important
                national objectives, including the goals of fair access to credit,
                community development, and stable homeownership by the broadest
                spectrum of America.'' \29\ To address these concerns, the OCC requires
                banks engaged in lending to take into account the borrower's ability to
                repay the loan according to its terms.\30\ In the OCC's experience, ``a
                departure from fundamental principles of loan underwriting generally
                forms the basis of abusive lending: Lending without a determination
                that a borrower can reasonably be expected to repay the loan from
                resources other than the collateral securing the loan, and relying
                instead on the foreclosure value of the borrower's collateral to
                recover principal, interest, and fees.'' \31\
                ---------------------------------------------------------------------------
                 \29\ OCC Advisory Letter 2003-2.
                 \30\ See, 12 CFR 7.4008(b), 34.3(b), part 30, appendix A, II.C.2
                and II.D.3.
                 \31\ OCC Advisory Letter 2003-2, at 3.
                ---------------------------------------------------------------------------
                 Additionally, the OCC has cautioned banks about lending activities
                that may be considered predatory, unfair, or deceptive, noting that
                many such lending practices are unlawful under existing federal laws
                and regulations or otherwise present significant safety, soundness, or
                other risks. These practices include those that target prospective
                borrowers who cannot afford credit on the terms being offered, provide
                inadequate disclosures of the true costs and risks of transactions,
                involve loans with high fees and frequent renewals, or constitute loan
                ``flipping'' (frequent re-financings that result in little or no
                economic benefit to the borrower that are undertaken with the primary
                or sole objective of generating additional fees).\32\ Policies and
                procedures should also be designed to ensure clear and transparent
                disclosure of the terms of the loan, including relative costs, risks,
                and benefits of the loan transaction, which helps to mitigate the risk
                that a transaction could be unfair or deceptive. The NPR also
                highlighted specific questions that the OCC evaluates as part of its
                robust supervision of banks' lending relationships.\33\
                ---------------------------------------------------------------------------
                 \32\ See OCC Advisory Letter 2000-7, ``Abusive Lending
                Practices'' (July 25, 2000); OCC Advisory Letter 2000-10, ``Payday
                Lending'' (Nov. 27, 2000); OCC Advisory Letter 2003-2; OCC Advisory
                Letter 2003-3; and OCC Bulletin 2014-37.
                 \33\ See 85 FR at 44227.
                ---------------------------------------------------------------------------
                 In addition to this framework targeted at banks' lending
                activities, the OCC has issued comprehensive guidance on third-party
                risk management.\34\ These standards apply to any relationship between
                a bank and a third party, including lending relationships, regardless
                of which entity is the true lender. Pursuant to this guidance, the OCC
                expects banks to institute appropriate safeguards to manage the risks
                associated with their third-party relationships.
                ---------------------------------------------------------------------------
                 \34\ See, e.g., OCC Bulletin 2013-29, ``Third-Party
                Relationships: Risk Management Guidance'' (Oct. 30, 2013); OCC
                Bulletin 2020-10, ``Third-Party Relationships: Frequently Asked
                Questions to Supplement OCC Bulletin 2013-29'' (Mar. 5, 2020).
                ---------------------------------------------------------------------------
                 Under the final rule, this robust supervisory framework will
                continue to apply to banks that are the true lender in a lending
                relationship with a third party. Rather than allowing banks to enter
                into rent-a-charter schemes, the final rule will ensure that banks
                understand that the OCC will continue
                [[Page 68747]]
                to hold banks accountable for their lending activities.
                IV. Regulatory Analyses
                 Paperwork Reduction Act. In accordance with the requirements of the
                Paperwork Reduction Act of 1995 (PRA), 44 U.S.C. 3501 et seq., the OCC
                may not conduct or sponsor, and respondents are not required to respond
                to, an information collection unless it displays a currently valid
                Office of Management and Budget (OMB) control number. The OCC has
                reviewed the final rule and determined that it will not introduce any
                new or revise any existing collection of information pursuant to the
                PRA. Therefore, no submission will be made to OMB for review.
                 Regulatory Flexibility Act. The Regulatory Flexibility Act (RFA), 5
                U.S.C. 601 et seq., requires an agency, in connection with a final
                rule, to prepare a Final Regulatory Flexibility Analysis describing the
                impact of the rule on small entities (defined by the Small Business
                Administration (SBA) for purposes of the RFA to include commercial
                banks and savings institutions with total assets of $600 million or
                less and trust companies with total assets of $41.5 million or less) or
                to certify that the final rule would not have a significant economic
                impact on a substantial number of small entities.
                 The OCC currently supervises approximately 745 small entities. The
                OCC expects that all of these small entities would be impacted by the
                rule. While this final rule could affect how banks structure their
                current or future third-party relationships as well as the amount of
                loans originated by banks, the OCC believes the costs associated with
                any administrative changes in bank lending policies and procedures
                would be de minimis. Banks already have systems, policies, and
                procedures in place for issuing loans when third parties are involved.
                It takes significantly less time to amend existing policies than to
                create them, and the OCC does not expect any needed adjustments will
                involve an extraordinary demand on a bank's human resources. In
                addition, any costs would likely be absorbed as ongoing administrative
                expenses. Therefore, the OCC certifies that this rule will not have a
                significant economic impact on a substantial number of small entities.
                Accordingly, a Final Regulatory Flexibility Analysis is not required.
                 Unfunded Mandates Reform Act. Consistent with the Unfunded Mandates
                Reform Act of 1995 (UMRA), 2 U.S.C. 1532, the OCC considers whether a
                final rule includes a federal mandate that may result in the
                expenditure by state, local, and tribal governments, in the aggregate,
                or by the private sector, of $100 million adjusted for inflation
                (currently $157 million) in any one year. The final rule does not
                impose new mandates. Therefore, the OCC concludes that implementation
                of the final rule would not result in an expenditure of $157 million or
                more annually by state, local, and tribal governments, or by the
                private sector.
                 Riegle Community Development and Regulatory Improvement Act.
                Pursuant to section 302(a) of the Riegle Community Development and
                Regulatory Improvement Act of 1994 (RCDRIA), 12 U.S.C. 4802(a), in
                determining the effective date and administrative compliance
                requirements for new regulations that impose additional reporting,
                disclosure, or other requirements on insured depository institutions,
                the OCC must consider, consistent with principles of safety and
                soundness and the public interest, any administrative burdens that such
                regulations would place on depository institutions, including small
                depository institutions, and customers of depository institutions, as
                well as the benefits of such regulations. In addition, section 302(b)
                of RCDRIA, 12 U.S.C. 4802(b), requires new regulations and amendments
                to regulations that impose additional reporting, disclosures, or other
                new requirements on insured depository institutions generally to take
                effect on the first day of a calendar quarter that begins on or after
                the date on which the regulations are published in final form. This
                final rule imposes no additional reporting, disclosure, or other
                requirements on insured depository institutions, and therefore, section
                302 is not applicable to this rule.
                 Congressional Review Act. For purposes of the Congressional Review
                Act (CRA), 5 U.S.C. 801 et seq., the Office of Information and
                Regulatory Affairs (OIRA) of the OMB determines whether a final rule is
                a ``major rule,'' as that term is defined at 5 U.S.C. 804(2). OIRA has
                determined that this final rule is not a major rule. As required by the
                CRA, the OCC will submit the final rule and other appropriate reports
                to Congress and the Government Accountability Office for review.
                 Administrative Procedure Act. The APA, 5 U.S.C. 551 et seq.,
                generally requires that a final rule be published in the Federal
                Register not less than 30 days before its effective date. This final
                rule will be effective 60 days after publication in the Federal
                Register, which meets the APA's effective date requirement.
                List of Subjects in 12 CFR Part 7
                 Computer technology, Credit, Derivatives, Federal savings
                associations, Insurance, Investments, Metals, National banks, Reporting
                and recordkeeping requirements, Securities, Security bonds.
                Office of the Comptroller of the Currency
                 For the reasons set out in the preamble, the OCC amends 12 CFR part
                7 as follows.
                PART 7--ACTIVITIES AND OPERATIONS
                0
                1. The authority citation for part 7 continues to read as follows:
                 Authority: 12 U.S.C. 1 et seq., 25b, 29, 71, 71a, 92, 92a, 93,
                93a, 95(b)(1), 371, 371d, 481, 484, 1463, 1464, 1465, 1818, 1828(m)
                and 5412(b)(2)(B).
                0
                2. Add Sec. 7.1031 to read as follows:
                Sec. 7.1031 National banks and Federal savings associations as
                lenders.
                 (a) For purposes of this section, bank means a national bank or a
                Federal savings association.
                 (b) For purposes of sections 5136 and 5197 of the Revised Statutes
                (12 U.S.C. 24 and 12 U.S.C. 85), section 24 of the Federal Reserve Act
                (12 U.S.C. 371), and sections 4(g) and 5(c) of the Home Owners' Loan
                Act (12 U.S.C. 1463(g) and 12 U.S.C. 1464(c)), a bank makes a loan when
                the bank, as of the date of origination:
                 (1) Is named as the lender in the loan agreement; or
                 (2) Funds the loan.
                 (c) If, as of the date of origination, one bank is named as the
                lender in the loan agreement for a loan and another bank funds that
                loan, the bank that is named as the lender in the loan agreement makes
                the loan.
                Brian P. Brooks,
                Acting Comptroller of the Currency.
                [FR Doc. 2020-24134 Filed 10-29-20; 8:45 am]
                BILLING CODE 4810-33-P
                

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