US Suits OCC, Challenging “Real Lender” Rule | Locke Lord LLP

On January 5, 2021, the Attorneys General of New York, California, Colorado, District of Columbia, Massachusetts, Minnesota, New Jersey and North Carolina (collectively, the “States”) sued the Office of the Comptroller of the Currency (the “OCC”), alleging that its “true lender” rule (the “true lender rule”) is invalid.1 The lawsuit represents the first legal challenge to the True Lender Rule, which came into effect on December 29, 2020.2

Background to the True Lender Rule

On June 2, 2020, the OCC published its final rule clarifying that an assignee of a national bank is entitled to charge interest at the same rate as the national bank on loans made by the national bank.3 In doing so, the OCC codified the common law doctrine of “valid when granted”, which states that a loan which was valid when made will not be rendered usurious by a subsequent transfer. Our analysis of the OCC “valid once done” rule is available here. At the time, the OCC declined to address the related issue of whether a bank is the “real lender” in a transaction where the loan is assigned to the assignee shortly after being made pursuant to an agreement between the bank. bank and the assignee. On October 29, 2020, the OCC answered this question by promulgating the True Lender Rule, which provides that a bank grants a loan if, on the inception date, it (1) is named as a lender in the loan agreement. . or (2) finance the loan.4 When a bank is named as the lender in the loan agreement and another entity funds the loan, the entity named as the lender in the loan agreement is the actual lender for that loan.5 Our analysis of the True Lender Rule is available here.

The suit

Concerned that the True Lender Rule would facilitate predatory lending by non-bank entities, states have filed a lawsuit in the United States District Court for the Southern District of New York. In their factum, the States submit that the true lender rule is void under the Administrative Procedures Act (the “APA”).6 Specifically, the states argue that the true lender rule goes beyond the statutory authority granted to the OCC under federal law and in fact unreasonably interprets that federal In support of their argument, the States suggest that the standard set forth in the true lender rule departs significantly from the established true lender analysis applied by the courts, ignores the economic realities of the lending transaction, and does not not solve the problem it claims to solve. remedy.8 In particular, states highlight the apparent tension between the True Lender Rule and the OCC’s long-standing policy of condemning bank leasing programs in which domestic banks simply act as intermediaries for loans made by non-bank entities. that would otherwise be illegal under state usury. law.9 From a state perspective, the True Lender Rule favors these “fictitious arrangements” between domestic banks and non-bank lenders.ten

The OCC has yet to file a response brief, but when it does, it will likely expand on the arguments it made in the press release accompanying the publication of the True Lender Rule. In that statement, the OCC explained that the True Lender Rule interprets a statutory ambiguity in the National Bank Act of 1864 which has resulted in legal uncertainty.11 The OCC noted in the statement that the True Lender Rule would reduce this legal uncertainty by simplifying the analysis for courts, which had previously applied a complex balancing test, leading to divergent results on virtually identical facts.12 Finally, in response to the accusation that the True Lender Rule encourages predatory lending, the OCC held that the True Lender Rule actually frustrates bank leasing programs by implementing a clear and easily administered test.13

We will continue to monitor the lawsuit for new developments.

1. Plaintiffs’ brief in New York v. OCC, # 1: 21-cv-00057 (SDNY January 5, 2021).
2. National banks and federal savings associations as lenders, 85 Fed. Reg. 68 742 (Oct. 30, 2020) (codified in 12 CFR § 7.1031).
3. Allowable interest on loans that are sold, assigned or otherwise transferred, 85 Fed. Reg. 33,530 (June 2, 2020).
4. 12 CFR § 7.1031 (b).
5. Id. § 7.1031 (c).
6. Applicants’ brief at 21.
7. Id. At 23, 25.
8. Id. At 25, 27.
9. Id. At 33.
10. Id. At 33.
11. 85 Fed. Reg. 68 742.
12. Id. At 68,743.
13. Id.

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