Morpheus: “He is the one.”
— The Matrix
Last week, the Office of the Comptroller of the Currency (OCC) did its best to simplify the search for the one “true lender” in any transaction. Its proposed rule should provide clarity to lending partnerships between banks and third-party non-banks, such as marketplace lenders (MPL).
It’s the OCC’s second step, following its rule regarding the “valid when made” doctrine to end the uncertainty created by decisions like Madden v. Midland. Yet, based on at least one court’s reaction to that prior rule, it appears that some folks are just not ready to be unplugged from the current rubric.
The Search for the True Lender
The identity of the “true lender” determines which legal framework will apply to an MPL transaction based on a bank partnership model. Hanging in the balance is whether state usury laws apply or the bank’s exemption from such laws will allow a higher rate to be charged to the consumer. Federal law does not provide the answer. It authorizes banks to make loans and subsequently transfer and assign them, but does not expressly address which entity is the “true lender.”
In the absence of clear federal guidance, courts have developed a growing body of divergent standards to resolve “true lender” battles. As the OCC points out, some courts have focused on the “form of the transaction alone” as determinative, while others have engaged in complex balancing tests that analyze the length of time a loan is held, which entity advances the funds, financial reporting obligations, and indemnification between the parties.
To address the legal uncertainty, the OCC proposed rule simply provides: A bank makes a loan whenever it, as of the date of origination, (1) is named as the lender in the loan agreement or (2) funds the loan.
It would seem then that the OCC has sufficiently covered both form and substance with an elegant solution; however, the OCC’ may not be able to codify away confusion in the courts.
At least one court has already decided to disregard the OCC’s separate codification of the “valid when made doctrine” because federal agencies are only entitled to “some deference.” Perhaps Agent Smith was right — humans really do prefer misery over perfection.
Following Madden v. Midland, clarification from regulatory and legislative bodies has long been desired to provide stakeholders a definitive path forward. Now, the OCC has opened the door, but it’s up to the courts now to walk through it and give participants the certainty they need. Until then, careful consideration of the fact-specific legal analysis currently applied will be required.
Adam Levy and Nicole Serratore, attorneys in the Insolvency, Creditors’ Rights and Financial Products Group, each contributed to this post.