Alston & Bird Consumer Finance Blog

#truelender

The District of Columbia Continues to Fight the “True Lender” Rule in Court

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A&B ABstract:

Innovative partnerships between banks and nonbanks have expanded lending services to consumers and small businesses. These partnerships, known as marketplace lending arrangements, offer non-traditional loan products to consumers and small businesses. Significantly, state laws establishing interest rate caps do not apply to marketplace lending arrangements where the bank is the true lender. But with this innovation has come debate about whether the bank is the true lender. The Office of the Comptroller of the Currency’s “True Lender” rule, which became effective on December 29, 2020, was intended to address uncertainties in these partnerships.

Under the “True Lender” rule, a bank is deemed the true lender if, at the time of origination, it is named as the lender in the loan agreement or funds the loan. Proponents of the “True Lender” rule argue that marketplace lending arrangements expand access and that the rule provides necessary guidance to enable banks and their non-bank partners to comply with the law. Others, however, have sharply criticized the rule, arguing it allows payday lenders to circumvent state laws prohibiting predatory ultra-high interest-loans.

Several state attorneys general are challenging the “True Lender” rule in the courts. Earlier this year, District of Columbia Attorney General Karl. A. Racine joined eight other Attorneys General in filing a lawsuit against the Office of the Comptroller of the Currency to stop implementation of “True Lender” rule. This month, the D.C. Office of the Attorney General has taken its challenge to the parties themselves by filing its first lawsuit involving a marketplace lending arrangement since the “True Lender” rule’s enactment.

District of Columbia v. Opportunity Financial, LLC

On April 5, 2021, the District of Columbia (“the District”), by and through AG Racine, filed a complaint in the Superior Court of the District of Columbia against Opportunity Financial, LLC (“OppFi”), an online lending company. The District alleges in its complaint that OppFi violated the District of Columbia Consumer Protection Procedures Act and title 16 of the District of Columbia Municipal Regulations.

The Complaint

According to the complaint, OppFi has engaged in predatory lending practices that target the District’s most vulnerable citizens. Specifically, the District alleges that OppFi has been deceptively marketing illegal, high-interest loans. In 2018, OppFi partnered with FinWise Bank to launch a bank-sponsored product called “OppLoans,” which it offers to D.C. residents. However, OppFi has never held a money lender license as required by D.C. law. OppFi also offers loans to D.C. consumers at interest rates of up to 198%, a rate which dramatically exceeds D.C.’s interest rate cap of 24%. The District also alleges that OppFi falsely represents OppLoans as more affordable than payday loans, tells consumers that taking out an OppLoan will help improve the borrower’s credit score despite OppFi’s knowledge to the contrary, does not adequately disclose that OppLoans are high cost, risky loans that should only be used for emergencies, and fails to tell consumers that refinancing a current loan is often more expensive than obtaining a second loan.

Despite OppFi’s partnership with FinWise Bank, the District asserts that OppFi is the true lender because it has the predominant economic risk, bears the risk of poor performance, and funds the expenses for the provision of OppLoans. Meanwhile, FinWise’s fees and expenses related to OppLoans are capped per its agreements with OppFi. In support, the District also alleges that OppFi is the servicer for OppLoans, controls and pays for all OppLoans marketing, and owns the OppLoans trademark and associated intellectual property rights. Further, potential borrowers are screened using OppFi’s proprietary scorecard and can only obtain an OppLoan through opploans.com. Interested consumers attempting to obtain an OppLoan directly through FinWise Bank’s website are redirected to OppFi’s website.

The District seeks a court order voiding improperly made loans, as well as injunctive relief, restitution for consumers, civil penalties, and costs.

Takeaway

While states challenge the “True Lender” rule in court, Senate Democrats have mounted an attack aimed at overturning it. President Biden has yet to announce his nominee to lead the Office of the Comptroller of the Currency, which could provide additional insight on the administration’s direction with the rule. Financial institutions involved in marketplace lending arrangements should pay close attention to litigation that can provide insight into the practical effects of the “True Lender” rule’s bright-line test on state litigation.

OCC’s Final “True Lender” Rule Takes Effect

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A&B ABstract:

On October 27, 2020, the Office of the Comptroller of the Currency (“OCC”) issued a noteworthy final rulemaking that sets forth when a national bank or federal savings association originates a loan and is deemed the “true lender” in the context of a partnership between a bank and a non-bank third party, known commonly as a marketplace lending arrangement.

Under the rule, the OCC considers the bank the “True Lender” if it: (i) is named as the lender in the loan agreement, or (ii) funds the loan.  The rule clarifies, however, that under these arrangements, the bank retains the compliance, underwriting, and credit risk obligations associated with the origination of such loans.  The rule becomes effective on December 29, 2020.

Background

Marketplace lending arrangements involve a partnership between a bank and a non-bank third party to offer consumers or small businesses, as the case may be, a variety of often non-traditional consumer and business loan products that are marketed and originated through innovative technologies. The advantage of these products is that consumers and small businesses are able to access credit quickly, in certain cases from their smart phones, without the laborious underwriting and approval procedures associated with traditional brick and mortar lending.

The bank partner, who is the named originator in the lending documents, is able to export the often very favorable interest rate of the state where it is located without regard to state usury and fee limits, and is in most instances, exempt from state loan originator/servicer licensing requirements by virtue of being a bank.

Scrutiny of Marketplace Lending Arrangements

Marketplace lending arrangements have faced scrutiny from governmental regulators and courts over the past several years, and  some have been derided as “rent-a charter” schemes under which the non-bank partner essentially offers the particular loan products with minimal input from the bank partner to, among other things, evade state usury and fee limitations and licensing requirements that would ordinarily be applicable to the non-bank partner.

 The OCC Rulemaking

In the rule, however, the OCC observed that marketplace lending arrangements expand credit opportunities beyond the reach of the customary lending traditionally offered by banks.  The OCC recognized some of the challenges raised about such arrangements, and issued the rule to provide “legal certainty” regarding these partnerships and to encourage banks to enter into them. Under the rule, a bank makes a loan when, as of origination, the bank (i) is names as the lender in the loan agreement or (ii) funds the loan.

To dispel any notion that the rule will facilitate “rent-a-charter” arrangements, the OCC clarifies that when making loans under these marketplace arrangements, banks are responsible for:

establishing and maintaining prudent underwriting practices that (1) are commensurate with the types of loans the bank will make and consider the terms and conditions under which they will be made; (2) consider the nature of the markets in which the loans will be made; (3) provide for consideration, prior to credit commitment, of the borrower’s overall financial condition and resources, the financial responsibility of any guarantor, the nature and value of any underlying collateral, and the borrower’s character and willingness to repay as agreed; (4) establish a system of independent, ongoing credit review and appropriate communication to management and to the board of directors; (5) take adequate account of concentration of credit risk; and (6) are appropriate to the size of the institution and the nature and scope of its activities.

Lenders’ Compliance Obligations

Notably, the OCC also tasks banks with the responsibility to (i) undertake comprehensive loan documentation practices, (ii) adopt internal risk management controls, and (iii) ensure compliance with all laws applicable to the marketplace lending programs offered. Further, the OCC warns banks to ensure that they adequately supervise their third-party partners, and that the loans offered under such arrangements do not contain predatory, unfair or deceptive or abusive features.

Takeaways

The OCC rulemaking is a significant victory for marketplace lending arrangements, and provides needed guidance regarding ensuring that these partnerships comply with applicable law. The OCC rule, like the recent OCC and FDIC rulemakings affirming the “Valid-When-Made” doctrine, has been harshly criticized by certain state regulators and consumer groups for circumventing state usury, licensing and consumer protection laws. Further, this OCC rulemaking may be amended or withdrawn by the incoming Biden Administration, especially since the current OCC Director serves in an acting capacity, and could be replaced by a more consumer-oriented leader.

Consistent with the OCC rule, we recommend that parties in marketplace lending arrangements heed the following to ensure that the bank is deemed the “true lender”:

  1. the bank must play the primary role in underwriting and making credit decisions;
  2. the bank must play a major role in creating, branding and marketing the program; these tasks may not be performed exclusively by the non-bank partner;
  3. the bank needs to make the required disclosures to the consumer in its name;
  4. The consumer should be aware that it’s receiving a loan from the bank; not the non-bank partner;
  5. the bank should hold the predominant economic interest in the transaction through an examination of the totality of the circumstances and
  6. at a minimum, the non-bank partner should be licensed under applicable state law to buy the loans from the bank and to service the loans.