The Office of the Comptroller of the Currency has issued a final rule that will close a gap in the process of banks selling loans to third parties, such as debt buyers, which could help facilitate more portfolio sales.
The rule will go into effect 60 days after it is published in the Federal Register. A copy of the final rule can be accessed by clicking here.
Known as the “True Lender” rule, it says that 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.
The goal of the rules is to reduce “legal uncertainty” that may have discouraged banks and third parties from partnering and had “chill”ed innovation, which restricts consumer access to credit, according to the OCC.
Under the rule, a bank that makes the loan is the true lender, if, as of the day the loan is originated, it is named as the lender in the loan agreement or it funds the loan. The rule also specifies that 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.
Consumer advocates accused the OCC of allowing “predatory lenders” to make an “end-run” around state interest rate caps, which will ultimately hurt consumers.
“Today’s rule takes us back to the time 20 years ago, when payday lenders were evading state interest rate caps merely by putting a bank’s name on the paperwork,” said Lauren Saunders, associate director of the National Consumer Law Center, in a statement. “The OCC’s rule protects predatory online lenders that are charging 160% or more in violation of state interest law, and eviscerates power that states have had since the time of the American Revolution to protect people from predatory lending. The OCC’s rule would prohibit courts from looking behind the fine print to the truth about which party is running the loan program and is the ‘true lender.’ “