States Seek to Invalidate The OCC True Lender Rule

Financial Industry Alert

  • Complaint filed in People of the State of New York, et al. v. Office of the Comptroller of the Currency, et al., No. 1:21-Civ-00057 (S.D.N.Y. Jan. 5, 2021)

Recently, seven states (New York, California, Colorado, Massachusetts, New Jersey, Minnesota, and North Carolina) and the District of Columbia filed suit in the Southern District of New York against the Office of the Comptroller of the Currency (“OCC”) and Brian P. Brooks, the Acting Comptroller of the Currency. Plaintiffs ask the court to invalidate the OCC’s recently promulgated rule clarifying the identity of a loan’s so-called true lender (True Lender Rule). The fate of that rule—along with the OCC’s related rule addressing the fallout of Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015)—may have important implications for partnerships between banks and non-bank lending platforms.

The True Lender Rule clarifies that a national bank is the “lender” when it issues a loan  in partnership with a non-bank third party if, as of the date of origination, the bank is named the lender in the loan agreement or it funds the loan. By establishing those bright-line rules, the OCC aimed to dispel uncertainty about when the bank in such partnerships qualifies as the “true lender”—and, accordingly, when federal preemption of state-law usury laws applies to the loan.

Having failed to persuade the OCC to adopt their policy preferences in its rulemaking (see Attorney General of the State of New York, et al., Comment Letter on True Lender Rule (Sept. 3, 2020)), plaintiffs now seek to invalidate the True Lender Rule under the Administrative Procedure Act (APA).

Brief Background

When nationally chartered banks issue loans, they are subject only to the usury limits of the bank’s home state. Federal law expressly authorizes those banks to apply the interest rates allowed in the bank’s home state to borrowers in other states, regardless of the usury limits that otherwise apply to loans in the borrower’s home state. When banks have made loans in partnership with non-bank third parties, some borrowers and others have asserted that the bank is not the true lender, and, accordingly, that federal preemption should not apply.  Courts considering these assertions have applied divergent tests resulting in inconsistent decisions about which entity should be considered as making the loan—i.e., who is the “true lender” from a usury perspective. Such uncertainty can discourage lending by bank-platform partnerships and undermine access to credit. The OCC promulgated its True Lender Rule to avoid such confusion and to reiterate its commitment to robustly regulating national banks identified as lenders.

During the notice and comment period on the Rule, commenters referenced the OCC’s longstanding policy prohibiting banks from entering into so-called “rent-a-charter schemes,” where a nonbank is allowed to exploit the charter of a bank to issue loans over the usury limit. The OCC explained that the Rule did “not reverse the OCC’s position.”  It explained that 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,” and that the Rule “would solve the rent-a-charter issues raised and ensure that banks do not participate in those arrangements.”  Acting Comptroller Brooks explained in written testimony before the Committee on Financial Services of the U.S. House of Representatives: “[i]n addition to defining ‘true lender,’ the rule clarifies that if a bank is the ‘true lender’ of a loan it is ultimately accountable for the applicable compliance obligations attached to the origination of that loan. Thus, the rule negates the ability for banks to originate and walk away from the responsibility for those loans. This will result in eliminating the greatest risk associated with abusive rent-a-charter.” Hearing on Oversight of Prudential Regulators: Ensuring the Safety, Soundness, Diversity and Accountability of Depository Institutions during the Pandemic Before the U.S. House Comm. on Fin. Servs., 116 Cong. (Nov. 12, 2020) (Statement of Brian P. Brooks, Acting Comptroller of the Currency).

The S.D.N.Y. Complaint

On January 5, 2021, plaintiffs filed a civil action seeking to invalidate the OCC True Lender Rule on several grounds.

First, the complaint alleges that the Rule is beyond the scope of the OCC’s authority.  The OCC is authorized to promulgate rules to clarify an ambiguity or gap in the laws it enforces. The agency said that in issuing the True Lender Rule it was clarifying three lending statutes: the National Bank Act, 12 U.S.C. § 24; the Federal Reserve Act, 12 U.S.C. § 371; and the Home Owners’ Loan Act, 12 U.S.C. § 1463. The complaint contends that those statutes do not address true lender issues, and thus contain no relevant ambiguity and do not authorize the True Lender Rule.

Second, the complaint alleges that, even if those statutes could be read to address true lender issues, the True Lender Rule would be a substantively unreasonable interpretation.  Plaintiffs characterize the OCC’s bright-line standard as deviating from “centuries” of usury law, and as turning a blind eye to the economic realities of the transactions.  They further assert that the Rule opens the door for unregulated and predatory lending under the auspices of federal law.

Third, the complaint charges that the OCC failed to comply with the Dodd-Frank Act’s procedural and substantive requirements for preempting state usury laws. Among other things, plaintiffs allege that the agency failed to consult with the Consumer Financial Protection Bureau, analyze preemption on a case-by-case basis, or ground its decision in “substantial evidence.”

Fourth, even though in adopting the Rule the OCC made clear it remained firmly opposed to rent-a-charter schemes, and that it would be better able to prevent them under the new Rule, the complaint contends that the OCC should be deemed to have reversed its longstanding policy of opposing “rent-a-bank schemes” without a reasoned explanation.

On those asserted grounds, the complaint claims that the True Lender Rule is an “arbitrary” and “capricious” rule that exceeds the OCC’s “statutory jurisdiction” and was promulgated “without observance of procedure required by law,” in violation of the Administrative Procedures Act.

The complaint echoes a similar action in the Northern District of California challenging on nearly identical grounds the OCC’s related Madden Rule. See Complaint for Declaratory and Injunctive Relief, People of the State of California ex rel. Becerra, et al. v. Office of the Comptroller of the Currency, et al. (N.D. Cal. Jul. 29, 2020). The parties’ cross-motions for summary judgment can be found here. The California district court will hold a hearing on those cross-motions on March 19, 2021.

Will The True Lender Rule Survive These Challenges?

While a full merits analysis is impossible at this early stage, several considerations favor the continued viability of the True Lender Rule. Congress has granted the OCC extensive regulatory authority over federally charted banks—including authority to preemptively regulate state consumer financial laws that significantly interfere with national banks’ powers. The question of when a loan issued by a national bank should be treated as improper—such that the national bank that issued the loan should not be viewed as the true lender—is by its nature a matter requiring a uniform federal rule, as opposed to conflicting rules from each of the 50 states and D.C.  The need for such uniformity was amply supported by evidence collected by the OCC during the rulemaking process. 85 Fed. Reg. 68744, n.14.

The true lender issue also inherently involves the question of when the national bank is acting improperly in issuing such a loan. Courts seem likely to recognize the role and the need for the federal regulator to address and regulate these matters. 

Moreover, the OCC’s rulemaking should be entitled to some degree of deference. Plaintiffs correctly note that the Dodd-Frank Act subjects the OCC’s rulemaking to Skidmore deference. See 12 U.S.C. § 25b(b)(5)(A). But while Skidmore deference is less robust than Chevron deference, it is nonetheless “a highly deferential standard of judicial review.” K. Hickman & M. Krueger, In Search of the Modern Skidmore Standard, 107 Col. L. Rev. 1235, 1259 (2007) (discussing empirical analysis of five years of post-United States v. Mead Corp., 533 U.S. 218 (2010) jurisprudence).

Of course, the continued vitality of the True Lender Rule could also depend on the policy course charted by the incoming Biden Administration. Although the Obama and Trump Administrations both supported the risk-management principles underlying the True Lender and Madden Rules, it is possible the new administration could take a different approach.