Bank-fintech relationships in the dark until US election results declared

By Emma Olsson | 3 November 2020

The Office of the Comptroller of the Currency’s (OCC) newly issued true lender rule for bank-nonbank lending relationships faces potential Congressional Review pending tomorrow’s US election results.

“This [true lender] rule coming out now and going into full effect between the election and the inauguration is something that will be potentially up for review under the Congressional Review Act  and by the OCC to go on a reverse course and say ‘never mind’. Or is that going to be hard for them to do, having just done this rulemaking?” asks Jeffrey Naimon, partner, Buckley LLP.

First proposed in July, the true lender rule determines when a national bank makes a loan and is the “true lender” in the context of a third party partnership. According to an announcement by the OCC on October 27, the true lender rule is an attempt to assuage legal uncertainty surrounding bank-nonbank relationships which could discourage partnerships moving forward.

“What advocates want is not to have an OCC rule that’s simple and clear – they want it to be complicated because they want lenders and then purchasers of loans, the secondary market, to be worried that there’s a big risk that the loans aren’t enforceable. Their goal is to say ‘no, you aren’t operating under the OCC’s rules, you’re operating under 50 state rules’,” says Naimon.

But finalisation in such close proximity to the election adds uncertainty to a rule intended to bring clarity and regulatory uniformity.

“One of the things we’re all talking about in Washington about the potential results of the election is which of the bank regulatory initiatives of recent times will be reversed if things change?” says Naimon.

In the case of a Biden presidency, Acting Comptroller Brian Brooks may not be re-appointed and Jelena McWilliams at the Federal Deposit Insurance Corporation (FDIC) may lose her majority, acting as a minority chair.

“There’ll be a reversal of who’s in power in the FDIC and the OCC and the [Consumer Financial Protection Bureau] (CFPB). And that makes a huge difference in which rulemakings do you go back and undo, what gets undone, what gets redone. If the Democrats win the Senate, what’s recent enough a final rule to be subject to the Congressional Review Act and reversed?” he says.

The true lender rule has faced backlash both from Democrats and the states. A letter sent by eight Democratic Senators in September criticised the OCC for “broadly applying federal pre-emption to undermine state consumer protection laws.” According to the letter, the rule does not meet requirements under the Dodd Frank Act and threatens to encourage “rent-a-bank” or “rent-a-charter” schemes.

“As a lawyer who defends lenders and defends banks, does this [rule] make a national bank a better place to do a ‘rent-a-charter’ or bank partnership? Yes. And even though I know as a lender or investor that this isn’t a perfect rule that provides me perfect protection, if I now have an OCC rule and the plaintiffs have to beat Chevron to win, prove that this rule is arbitrary first just to get to whatever the issue is, I think this is helpful,” says Naimon.

If the rule remains intact post-election, states will be able to exert power in other capacities, he says. For example, states can secure expansive licensing laws to cover activities of banks’ fintech partners in order to deny loans to counter the OCC’s authority.

“Of course [states] are upset. There’s an ongoing dialogue, discussion, argument about the proper role of states and federal and there has been forever … It’s a turf war at the end of the day and everybody wants to protect the turf,” he says.

“Do the states have other ways of accomplishing similar goals? Yes, there are other avenues that states may use and some are using to accomplish similar objectives and I’m not sure that they need to win on the true lender aspects of this to accomplish the regulatory objectives.”

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