The Office of the Comptroller of the Currency will soon propose a rule to try to clarify an issue that has long plagued digital lenders: a "true lender" doctrine that has at times complicated partnerships between banks and nonbank lenders.
Acting Comptroller Brian Brooks said during a June 11 webinar the agency will propose a rule on the issue "shortly." The true lender doctrine has created legal uncertainty for some bank-fintech partnerships, in which digital lenders often work with a bank to originate loans and then buy the loans from the bank.
The OCC took a step to provide more clarity on the issue on Brooks' first day on the job, finalizing a "Madden fix" that stated the interest rate on a loan can stay unchanged when it is transferred to another lender, thereby preempting any interest rate caps an individual state may have. But the OCC's rule still left a "giant" hole by not clarifying the true lender doctrine, Brooks said at the Online Lending Policy Institute event.
Some states have argued that fintech companies essentially rent a bank's charter, making the fintech companies the "true lender" on those loans. That, state regulators have said, means those fintech companies do not have the authority to preempt state laws and charge interest rates above state caps.
One key goal of the OCC rule will be to develop a clear test that "cannot be open to interpretation," one that will determine when a bank is the true lender on the loan and when an arrangement is a "sham" rent-a-bank scheme, Brooks said.
"We need a clear rule because without a clear rule, there would just be litigation," Brooks said.
The Conference of State Bank Supervisors has raised concerns with potential changes to the true lender doctrine, arguing it would take power away from state regulators on whether loans to their residents meet their consumer protection laws. The current doctrine "needs to be preserved as an important tool [to] address rent-a-bank schemes," the group said in a Feb. 5 hearing at the House Financial Services Committee.
The committee's chair, Rep. Maxine Waters, D-Calif., has said the OCC's Madden fix would let lenders "import high-rate, high-risk and otherwise illegal loans" in states with caps on interest rates.
Brooks said he has told Democrats not to "prejudge" the OCC's true lender rule and that it will make clear that the loans will be subject to the OCC's consumer protection authorities and disclosure requirements. The bank's regulator would be the "enforcement mechanism" for the rule, he said.
"Just because the bank is the true lender and the interest rate travels doesn't mean that there's a free pass for legal obligations," Brooks said. "That, I think, is where we kind of lost the narrative politically. People have this idea that if you're bank, then you get a free pass. That's not the case."
One example of the legal uncertainty the partnerships face came this week, when a Colorado state judge sided with the state attorney general's office in a 2017 lawsuit involving Cross River Bank and the digital lender Marlette Funding LLC.
In his order, District Court Judge Michael Vallejos ruled that that Cross River Bank cannot export its interest rate to nonbanks and that nonbank purchasers of loans cannot charge interest rates above Colorado's interest rate caps.
Cross River Bank declined to comment, and Marlette Funding did not immediately respond to a request for comment.
Brooks said the OCC is reviewing the court order, though he noted Cross River is a state-chartered bank and not under the OCC's jurisdiction of nationally chartered banks.
Brooks, a former board member at the digital lender Avant Inc., said his top priority is to help the agency develop clearer guidelines on banks' partnerships with fintech companies.
"It is my most important priority," he said. "I do not believe we can achieve financial inclusion without it."
The OCC now has a task force headed by the agency's top supervisor of large banks to write new guidelines for bank examiners on how they assess fintech partnerships, rather than treating them as regular vendors.
He also credited the Online Lending Policy Institute's members, which include Cross River Bank, for their work.
"The good work that you're doing has a lot to do with making credit available to people more safely and more cheaply than they previously have," he said. "That's the story that our world needs to tell better than we've done."
"This isn't predatory lending. This is a solution to payday lending," he said of the group's work.