OCC Issues Proposed Rule Aimed at Closing Gap in Debt Buying Process

The Office of the Comptroller of the Currency has issued a proposed rule that seeks to close a gap in the process of selling loans to third parties, which should further help the sale of portfolios in the debt buying market.

The proposed rule is fairly straightforward; it designates the bank that makes a loan is the “true lender” in the context of a relationship between a bank and a third party. The proposed rule supplements a rule that the OCC and the Federal Deposit Insurance Corp. each recently implemented that confirms the “valid when made” doctrine, which states that the terms of a loan remain valid after the loan is sold to an entity by a national bank.

“Banks’ lending relationships with third parties can facilitate access to affordable credit,” the OCC said in a statement announcing the proposed rule. “However, the relationships have been subject to increasing uncertainty about the legal framework that applies to loans made as part of these relationships. This uncertainty may discourage banks and third parties from entering into relationships, limit competition, and chill the innovation that results from these partnerships — all of which may restrict access to affordable credit.”

When it implemented the “valid when made” rule, the OCC realized there was a gap because the rule did not address which entity was the “true lender” when the loan was sold or transferred to a third party. The proposed rule released yesterday is short and sweet and closes that gap bty saying:

A national bank or federal savings association makes a loan when the national bank or Federal savings association, as of the date of origination:

– Is named as the lender in the loan agreement; or
– Funds the loan.

Comments on the proposed rule must be submitted before Sept. 3.

Consumer advocates were quick to come out and show their displeasure with the proposed rule. “The OCC’s ‘true lender’ proposal would turn state usury laws into a ‘dead letter,’ in the words of the U.S. Supreme Court, and eviscerate power that states have had since the time of the American Revolution to protect people from high interest rates and predatory lending,” said Lauren Saunders, associate director of the National Consumer Law Center, in a statement.

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