The Office of the Comptroller of Currency recently issued a proposed Final Rule concerning when a national bank is the “true lender” with respect to a given loan. The firm wrote about the rule on our blog. Lenders have debated the issue for years. In short, the rule provides that the national bank is the “true lender” if the bank is named as the lender in the loan agreement or if the bank funds the loan.
The new rule also clarifies that the “true lender” remains the same—and the loan’s interest rate and other terms remain enforceable—even if the loan is transferred or assigned.
OCC’s new rule has already had positive effects for lenders, even though it isn’t yet final. For example: in early August, Colorado settled a long-running “true lender” enforcement action against Marlette Funding, LLC and Avant of Colorado, LLC. OCC had initiated the enforcement actions more than three years earlier, in January 2017.
Marlette and Avant are online lending platforms that partner with national banks to market and process loans for online consumers. The companies generally marketed the loans online, then their national bank partners closed and funded the loans. The banks then assigned the loans back to Marlette and Avant for servicing and collection.
The Colorado Attorney General brought actions against the companies focusing primarily on alleged violations of the state’s 21% usury cap, finance charge limitations, and late fee charge limitations. Marlette and Avant asserted that they could enforce the loan agreements as written. The Attorney General disagreed, arguing that Marlette and Avant, as non-bank assignees, could not use statutory interest rate exportation and other rights reserved for banks. The Attorney General relied on Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015), cert. denied, 136 S. Ct. 2505 (2016). This June, a Colorado court agreed with the Attorney General and held that Marlette and Avant, as assignees, could not take advantage of the rights granted to national banks.
In the meantime, OCC issued its new proposed final rule. Just a few weeks later, Colorado announced its settlement with Marlette and Avant. See here for the full text of the settlement.
While the settlement does not mention OCC rule, the legal landscape has clearly shifted—and the effects of Madden v. Midland Funding are shrinking. Under the settlement, Marlette and Avant can continue to work with national banks through their online platforms without being subject to future Colorado enforcement actions as long as the loan agreements do not exceed 36%. This is substantially higher than the Colorado 21% usury cap. It is difficult to imagine that Colorado would have agreed to this settlement but for OCC’s new rule.
The settlement had a few other salient features. The online platforms agreed to obtain certain licenses from Colorado financial regulators and agreed to certain reporting requirements. Marlette and Avant also agreed that the partner banks must have certain levels of control and oversight, including bank approval of such matters as advertising copy, website content, loan terms and conditions, and credit approval and denial policies. This latter point is where the legal fight may shift. We may see more state financial regulators insist that national banks exercise more oversight and control over their local, non-bank partners.
As with most settlements, neither side obtained an optimal result. Colorado obtained an agreement from two lending platforms that might not be achievable once OCC’s rule takes effect, while Marlette and Avant put an end to litigation and governmental enforcement actions allowing them to move forward with business operations.