National Banks and Federal Savings Associations as Lenders, 68742-68747 [2020-24134]

Agencies

• Office of the Comptroller of the Currency
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 85, Number 211 (Friday, October 30, 2020)]
[Rules and Regulations]
[Pages 68742-68747]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-24134]


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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 7

[Docket ID OCC-2020-0026]
RIN 1557-AE97


National Banks and Federal Savings Associations as Lenders

AGENCY: Office of the Comptroller of the Currency, Treasury.

ACTION: Final rule.

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SUMMARY: The Office of the Comptroller of the Currency (OCC) is issuing 
this final rule to determine when a national bank or Federal savings 
association (bank) makes a loan and is the ``true lender,'' including 
in the context of a partnership between a bank and a third party, such 
as a marketplace lender. Under this rule, a bank makes a loan if, as of 
the date of origination, it is named as the lender in the loan 
agreement or funds the loan.

DATES: The final rule is effective on December 29, 2020.

FOR FURTHER INFORMATION CONTACT: Andra Shuster, Senior Counsel, Karen 
McSweeney, Special Counsel, Alison MacDonald, Special Counsel, or 
Priscilla Benner, Senior Attorney, Chief Counsel's Office, (202) 649-
5490, Office of the Comptroller of the Currency, 400 7th Street SW, 
Washington, DC 20219. For persons who are deaf or hearing impaired, TTY 
users may contact (202) 649-5597.

SUPPLEMENTARY INFORMATION:

I. Background

    Lending partnerships between national banks or Federal savings 
associations (banks) and third parties play a critical role in our 
financial system.\1\ These partnerships expand access to credit and 
provide an avenue for banks to remain competitive as the financial 
sector evolves. Through these partnerships, banks often leverage 
technology developed by innovative third parties that helps to reach a 
wider array of customers. However, there is often uncertainty about how 
to determine which entity is making the loans and, therefore, the laws 
that apply to these loans.\2\ This uncertainty may discourage banks 
from entering into lending partnerships, which, in turn, may limit 
competition, restrict access to affordable credit, and chill the 
innovation that can result from these relationships. Through this 
rulemaking, the Office of the Comptroller of the Currency (OCC) is 
providing the legal certainty necessary for banks to partner 
confidently with other market participants and meet the credit needs of 
their customers.
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    \1\ In this rulemaking, use of the terms ``partner'' or 
``partnership'' does not connote any specific legal relationship 
between a bank and a third party, and the terms ``partnership'' and 
``relationship'' are used interchangeably to describe a variety of 
relationships between banks and third parties.
    \2\ This is often referred to as a question of which entity is 
the `true lender.'
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    However, the OCC understands that there is concern that its 
rulemaking facilitates inappropriate `rent-a-charter' lending schemes--
arrangements in which a bank receives a fee to `rent' its charter and 
unique legal status to a third party. These schemes are designed to 
enable the third party to evade state and local laws, including some 
state consumer protection laws, and to allow the bank to disclaim any 
compliance responsibility for the loans. These arrangements have 
absolutely no place in the federal banking system and are addressed by 
this rulemaking, which holds banks accountable for all loans they make, 
including those made in the context of marketplace lending partnerships 
or other loan sale arrangements.
    On July 22, 2020, the OCC published a notice of proposed rulemaking 
(proposal or NPR) to determine when a bank makes a loan.\3\ Under the 
proposal, a bank made a loan if, as of the date of origination, it (1) 
was named as the lender in the loan agreement or (2) funded the loan.
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    \3\ 85 FR 44223.
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    As the proposal explained, federal law authorizes banks to enter 
into contracts, to make loans, and to subsequently transfer these loans 
and assign the loan contracts.\4\ The statutory framework, however, 
does not specifically address which entity makes a loan when the loan 
is originated as part of a lending partnership involving a bank and a 
third party, nor has the OCC taken regulatory action to resolve this 
ambiguity. In the absence of regulatory action, a growing body of case 
law has introduced divergent standards for resolving this issue, as 
discussed below. As a result of this legal uncertainty, stakeholders 
cannot reliably determine the applicability of key laws, including the 
law governing the permissible interest that may be charged on the loan.
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    \4\ See 12 U.S.C. 24(Third), 24(Seventh), 371, 1464; see also 12 
CFR 7.4008, 34.3, 160.30.
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    This final rule establishes a clear test for determining when a 
bank makes a loan, by interpreting the statutes that grant banks their 
authority to lend. Specifically, the final rule provides that a bank 
makes a loan when it, as of the date of origination, (1) is named as 
the lender in the loan agreement or (2) funds the loan.

II. Overview of Comments

    The OCC received approximately 4,000 comments on the proposal, the 
vast majority of which were from individuals using a version of one of 
three short form letters to express opposition to the proposal. Other 
commenters included banks, nonbank lenders, industry trade 
associations, community groups, academics, state government 
representatives, and members of Congress.
    Commenters supporting the proposal stated that the judicial true 
lender doctrine has led to divergent standards and uncertainty 
concerning the legitimacy of lending partnerships between banks and 
third parties. They also stated that, by removing the uncertainty, the 
OCC would help ensure that banks have the confidence to enter into 
these lending relationships, which provide affordable credit to 
consumers on more favorable terms than the alternatives, such as pawn 
shops or payday lenders, to which underserved communities often turn. 
Supporting commenters also observed that the proposal would enhance a 
bank's safety and soundness by facilitating its ability to sell loans. 
These commenters also noted that the proposal (1) makes clear that the 
OCC will hold banks accountable for products with unfair, deceptive, 
abusive, or misleading features that are offered as part of a 
relationship and (2) is consistent with the OCC's statutory mission to 
ensure that banks provide fair access to financial services.
    Commenters opposing the proposal stated that it would facilitate 
so-called rent-a-charter schemes, which would

[[Page 68743]]

result in increased predatory lending and disproportionately impact 
marginalized communities. Other opposing commenters stated that the 
proposal is an attempt by the OCC to improperly regulate nonbank 
lenders, a role they consider to be reserved exclusively to the states. 
Opposing commenters also asserted that the OCC did not have sufficient 
legal authority to issue the proposal and that the proposal violated 
the Administrative Procedure Act (APA) and 12 U.S.C. 25b.
    Both supporting and opposing commenters recommended changes. These 
recommendations included (1) adopting a test that requires the true 
lender to have a predominant economic interest in the loan; (2) 
providing additional ``safe harbor'' requirements to enhance consumer 
protections (e.g., interest rate caps); (3) clarifying that certain 
traditional bank lending activities do not fall under the funding prong 
of the rule (e.g., indirect auto lending and mortgage warehouse 
lending); (4) providing additional details on how the OCC would 
supervise these relationships; and (5) stating that the rule will not 
displace certain federal consumer protection laws and regulations.
    The comments are addressed in greater detail below.

III. Analysis

    As noted in the prior section, commenters raised a variety of 
issues for the OCC's consideration. These are discussed below.

A. OCC's Authority To Issue the Rule

    Some commenters argued the OCC lacks the legal authority to issue 
the rule because it would contravene the unambiguous meaning of 12 
U.S.C. 85. These commenters believe that section 85 incorporates the 
common law of usury as of 1864, which they view as requiring courts to 
look to the substance rather than the form of a transaction. In a 
similar vein, commenters argued that section 85 incorporates all usury 
laws of a state, including its true lender jurisprudence. One commenter 
also argued that the proposal contradicts judicial and administrative 
precedent interpreting sections 85 and 86.
    The OCC disagrees. The rule interprets statutes that authorize 
banks to lend--12 U.S.C. 24, 371, and 1464(c)--and clarifies how to 
determine when a bank exercises this lending authority. The OCC has 
clear authority to reasonably interpret these statutes, which do not 
specifically address when a bank makes a loan.\5\
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    \5\ See Chevron U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 
467 U.S. 837, 843 (1984) (``[I]f the statute is silent or ambiguous 
with respect to the specific issue, the question for the court is 
whether the agency's answer is based on a permissible construction 
of the statute.''); see also National Cable & Telecommunications 
Assoc., et al., v. Brand X internet Services et al., 545 U.S. 967 
(2005); Gutierrez-Brizuela v. Lynch, 834 F.3d 1142 (10th Cir. 2016).
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    Banks do not obtain their lending authority from section 85 or 12 
U.S.C. 1463(g). Nor are these statutes the authority the OCC is relying 
on to issue this rule. The proposal referenced sections 85 and 1463(g) 
in the regulatory text to ensure that interested parties understand the 
consequences of its interpretation of sections 24, 371, and 1464(c),\6\ 
including that this rulemaking operates together with the OCC's 
recently finalized `Madden-fix' rulemaking.\7\ When a bank makes a loan 
pursuant to the test established in this regulation, the bank may 
subsequently sell, assign, or otherwise transfer the loan without 
affecting the permissible interest term, which is determined by 
reference to state law.\8\
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    \6\ Although this rulemaking is not an interpretation of either 
section 85 or 1463(g), the OCC has clear authority to interpret 
these statutes, including as a basis for this rulemaking. See Smiley 
v. Citibank (S.D.), N.A., 517 U.S. 735 (1996) (Smiley) (deferring to 
the OCC's reasonable interpretation of section 85's ambiguity with 
respect to meaning of ``interest''). Section 1463(g) is interpreted 
in pari materia to section 85. See Gavey Props./762 v. First Fin. 
Sav. & Loan Ass'n, 845 F.2d 519, 521 (5th Cir. 1988) (``Given the 
similarity of language, the conclusion is virtually compelled that 
Congress sought to provide federally insured credit institutions 
with the same `most favored lender' status enjoyed by national 
banks.''); 61 FR 50951, 50968 (Sept. 30, 1996) (``OTS and its 
predecessor, the FHLBB, have long looked to the OCC regulation and 
other precedent interpreting the national bank most favored lender 
provision for guidance in interpreting [12 U.S.C. 1463(g)] and OTS's 
implementing regulation.''); OTS letter from Harris Weinstein, 
December 24, 1992, 1992 WL 12005275.
    \7\ Permissible Interest on Loans That Are Sold, Assigned, or 
Otherwise Transferred, 85 FR 33530 (June 2, 2020).
    \8\ 12 CFR 7.4001(e) and 160.110(d).
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    Other commenters questioned the OCC's authority on different 
grounds. Some asserted the OCC lacks authority to (1) exempt nonbanks 
from compliance with state law or (2) preempt state laws that determine 
whether a loan is made by a nonbank lender. One commenter also asserted 
that the proposal is an attempt by the OCC to interpret state law. A 
commenter further argued that the OCC's statutory interpretation is not 
reasonable, including because the proposal (1) would allow nonbanks to 
enjoy the benefits of federal preemption without submitting to any 
regulatory oversight and (2) violates the presumption against 
preemption, especially in an area of historical state police powers 
like consumer protection.
    This rulemaking does not assert authority over nonbanks, preempt 
state laws applicable to nonbank lenders, or interpret state law. It 
interprets federal banking law and has no direct applicability to any 
nonbank entity or activity. Rather, in identifying the true lender, the 
rule pinpoints key elements of the statutory, regulatory, and 
supervisory framework applicable to the loan in question. As noted in 
the proposal, if a nonbank partner is the true lender, the relevant 
state (and not OCC) would regulate the lending activity, and the OCC 
would assess the bank's third-party risk management in connection with 
the relationship itself.
    Furthermore, because commenters expressed concern that this rule 
would undermine state usury caps, it is also important to emphasize 
that sections 85 and 1463(g) provide a choice of law framework for 
determining which state's law applies to bank loans and, in this way, 
incorporate, rather than eliminate, state law. These statutes require 
that a bank refer to, and comply with, the usury cap established by the 
laws of the state where the bank is located. Thus, disparities between 
the usury caps applicable to particular bank loans result primarily 
from differences in the state laws that impose these caps, not from an 
interpretation that section 85 or 1463(g) preempt state law.
    A commenter also asserted that the OCC's interpretation is not 
reasonable because it (1) does not solve the problem it claims to 
remedy, arguing that the proposal itself is unclear and requires banks 
to undertake a fact-specific analysis and (2) departs from federal 
cases holding that state true lender law applies to lending 
relationships between banks and nonbanks.
    The OCC believes that this rule provides a simple, bright-line test 
to determine when a bank has made a loan and, therefore, is the true 
lender in a lending relationship. The only required factual analysis is 
whether the bank is named as the lender or funds the loan. The OCC has 
evaluated various standards established by courts and has determined 
that a clear, predictable, and easily administrable test is preferable. 
This test will provide legal certainty, and the OCC's robust 
supervisory framework effectively targets predatory lending, achieving 
the same goal as a more complex true lender test.
    Several commenters also asserted that the proposal contravenes 12 
U.S.C. 1, which charges the OCC with ensuring that banks treat 
customers fairly. One

[[Page 68744]]

commenter also argued that the proposal is inconsistent with the 
Community Reinvestment Act (CRA) because it encourages predatory 
lending. As the OCC explained in the proposal, the rule's purpose is to 
provide legal certainty to expand access to credit, a goal that is 
entirely consistent with the agency's statutory charge to ensure fair 
treatment of customers and banks' statutory obligation to serve the 
convenience and needs of their communities.

B. 12 U.S.C. 25b

    Several commenters asserted that the agency should have complied 
with 12 U.S.C. 25b, which applies when the OCC issues a regulation or 
order that preempts a state consumer financial law. Some of these 
commenters argued that the proposal fails to meet the preemption 
standard articulated in Barnett Bank of Marion County, N.A. v. Nelson, 
Florida Insurance Commissioner, et al. (Barnett),\9\ as incorporated 
into section 25b. Commenters also argued that (1) section 25b(f) does 
not exempt the OCC's proposal from the requirements of section 25b 
because the rule is not limited to banks charging interest and (2) the 
proposal undermines or contravenes section 25b(h) because it extends 
preemptive treatment to subsidiaries, affiliates, and agents of banks.
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    \9\ 517 U.S. 25 (1996).
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    The OCC disagrees: The requirements of section 25b are inapplicable 
to this rulemaking. Section 25b applies when the Comptroller 
determines, on a case-by-case basis, that a state consumer financial 
law is preempted pursuant to the standard for conflict preemption 
established by the Supreme Court in Barnett, i.e., when the Comptroller 
makes a preemption determination.\10\ This rulemaking does not preempt 
a state consumer financial law but rather interprets a bank's federal 
authority to lend. Furthermore, commenters arguing that section 25b(f) 
(which addresses section 85) does not exempt this rulemaking from the 
procedures in section 25b and that sections 25b(b)(2), (e), and (h)(2) 
(which address bank subsidiaries, affiliates, and agents) preclude the 
agency from issuing this rule are mistaken; this rulemaking is not an 
interpretation of section 85, nor does it address the applicability of 
state law to bank subsidiaries, affiliates, or agents.
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    \10\ Twelve U.S.C. 25b(b) also provides (1) a state consumer 
financial law is preempted if it has a discriminatory effect on 
national banks, in comparison with the effect of the law on a bank 
chartered by that state or (2) a state consumer financial law may be 
preempted by a provision of federal law other than title 62 of the 
Revised Statutes. See 12 U.S.C. 25b(b)(1)(A) and (b)(1)(C), 
respectively.
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C. Administrative Procedure Act

    Several commenters asserted that, for various reasons, the proposal 
is arbitrary and capricious and, therefore, in violation of the APA. 
Some commenters argued that the proposal lacks an evidentiary basis, 
either entirely or with respect to certain assertions, such as the 
existence of legal uncertainty. The OCC disagrees. The APA's arbitrary 
and capricious standard requires an agency to make rational and 
informed decisions based on the information before it.\11\ Furthermore, 
the standard does not require the OCC to develop or cite empirical or 
other data to support its rule or wait for problems to materialize 
before acting.\12\ Instead, the OCC may rely on its expertise to 
address the problems that may arise.\13\
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    \11\ Ass'n of Private Colls. & Univs. v. Duncan, 870 F. Supp. 2d 
133, 154 (D.D.C. 2012); see Motor Vehicle Mfrs. Ass'n of U.S., Inc. 
v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 52 (1983) (``The 
agency must explain the evidence which is available, and must offer 
a `rational connection between the facts found and the choice made.' 
'' (quoting Burlington Truck Lines, Inc. v. United States, 371 U.S. 
156, 168 (1962))).
    \12\ Stilwell v. Office of Thrift Supervision, 569 F.3d 514, 519 
(D.C. Cir. 2009) (``The APA imposes no general obligation on 
agencies to produce empirical evidence. . . . Moreover, agencies 
can, of course, adopt prophylactic rules to prevent potential 
problems before they arise. . . . OTS based its proposal on its long 
experience of supervising mutual savings associations; its view 
found support in various comments submitted in response to the 
proposal.''); Chamber of Commerce of U.S. v. SEC, 412 F.3d 133, 142 
(D.C. Cir. 2005) (holding that the SEC did not have to conduct an 
empirical study in support of its rulemaking where it based its 
decision on ``its own and its staff's experience, the many comments 
received, and other evidence, in addition to the limited and 
conflicting empirical evidence'').
    \13\ FCC v. WNCN Listeners Guild, 450 U.S. 582, 595-96 (1981) 
(granting deference to the agency's ``forecast of the direction in 
which future public interest lies''); U.S. Telecom Ass'n v. FCC, 825 
F.3d 674, 732 (D.C. Cir. 2016) (``[A]n agency's predictive judgments 
about areas that are within the agency's field of discretion and 
expertise are entitled to particularly deferential review, as long 
as they are reasonable.'' (emphasis in original) (quoting EarthLink, 
Inc. v. FCC, 462 F.3d 1, 12 (D.C. Cir. 2006)).
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    The OCC has decided to issue this rule to resolve the effects of 
legal uncertainty on banks and their third-party relationships. In this 
case, the OCC's views are informed by courts' divergent true lender 
tests and the resulting lack of predictability faced by 
stakeholders.\14\ While the OCC understands its rule may not resolve 
all legal uncertainty for every loan, this is not a prerequisite for 
the agency to take this narrowly tailored action.\15\ Taking these 
considerations into account, the OCC has made a rational and informed 
decision to issue this rule.
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    \14\ As explained in the proposal, in some cases, the court has 
concluded that the form of the transaction alone resolves this 
issue. In other cases, the courts have applied fact-intensive 
balancing tests, in which they have considered a multitude of 
factors. However, no factor is dispositive, nor are the factors 
assessed based on any predictable, bright-line standard. Even when 
nominally engaged in the same analysis--determining which entity has 
the ``predominant economic interest'' in the transaction--courts do 
not necessarily consider all of the same factors or give each factor 
the same weight. See 85 FR at 44224, n.8-15 and accompanying 
discussion. The comments the agency received from industry 
representatives further evidence this uncertainty.
    \15\ See Taylor v. Fed. Aviation Admin., 895 F.3d 56, 68 (2018); 
cf. Smiley, 517 U.S. at 743 (stating ``that there was good reason 
for the Comptroller to promulgate the new regulation, in order to 
eliminate uncertainty and confusion'').
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    Commenters also argued that the OCC's actions violate the APA 
because the agency has not given notice of its intention to reverse an 
existing policy or provided the factual, legal, and policy reasons for 
doing so. Specifically, these commenters referenced the OCC's 
longstanding policy prohibiting banks from entering into rent-a-charter 
schemes. This rulemaking does not reverse the OCC's position. The OCC's 
longstanding and unwavering opposition to predatory lending, including 
but not limited to predatory lending as part of a third-party 
relationship, remains intact and strong.\16\ In fact, this rulemaking 
would solve the rent-a-charter issues raised and ensure that banks do 
not participate in those arrangements. As noted in the proposal, the 
OCC's statutes and regulations, enforceable guidelines, guidance, and 
enforcement authority provide robust and effective safeguards against 
predatory lending when a bank exercises its lending authority. This 
rule does not alter this framework but rather reinforces its importance 
by clarifying that it applies to every loan a bank makes and by 
providing a simple test to identify precisely when a bank has made a 
loan. If a bank fails to satisfy its compliance obligations, the OCC 
will not hesitate to use its enforcement authority consistent with its 
longstanding policy and practice.
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    \16\ Commenters also asserted that this rulemaking is 
inconsistent with OCC Interpretive Letter 1002 (May 13, 2004) (IL 
1002), which specifically recognized the relationship between the 
entity that makes a loan and the applicable legal framework. While 
IL 1002 provides examples of how to determine which party makes a 
loan (e.g., the party that funded the loan), it did not purport to 
establish a determinative true lender test. By establishing such a 
test, this rulemaking complements IL 1002 and does not represent a 
reversal of an agency position.
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    Furthermore, the final rule does not change the OCC's expectation 
that all banks establish and maintain prudent credit underwriting 
practices and

[[Page 68745]]

comply with applicable law, even when they partner with third parties. 
These expectations were in place before the OCC issued its proposal and 
will remain in place after the final rule takes effect. For these 
reasons, the final rule does not represent a change in OCC policy.

D. Comments on the Proposed Regulatory Text

    As noted previously, the OCC's proposed regulatory text set out a 
test for determining when a bank has made a loan for purposes of 12 
U.S.C. 24, 85, 371, 1463(g), and 1464(c). Under this test, a bank made 
a loan if, as of the date of origination, it was named as the lender in 
the loan agreement or funded the loan.
    Some commenters supported the rule without change, stating that the 
proposal provided the clarity needed to determine which entity is the 
true lender in a lending relationship. Other commenters supported the 
proposal as a general matter but suggested specific changes, including 
clarifying that the funding prong does not include certain lending or 
financing arrangements such as warehouse lending, indirect auto lending 
(through bank purchases of retail installment contracts (RICs)), loan 
syndication, and other structured finance.
    These commenters are correct that the funding prong of the proposal 
generally does not include these types of arrangements: They do not 
involve a bank funding a loan at the time of origination. For example, 
when a bank purchases a RIC from an auto dealer, as is often the case 
with indirect auto lending, the bank does not ``fund'' the loan.\17\ 
When a bank provides a warehouse loan to a third party that 
subsequently draws on that warehouse loan to lend to other borrowers, 
the bank is not funding the loans to these other borrowers. In 
contrast, and as noted in the proposal, the bank is the true lender in 
a table funding arrangement when the bank funds the loan at 
origination.\18\
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    \17\ Two commenters requested that the OCC clarify that 
references to a ``loan'' apply solely to finance arrangements that 
involve a loan of money, such as have been the subject of the bank-
nonbank partnership arrangements prompting the proposal, and not to 
time price sales entered into by retail sellers regulated under 
applicable state sales finance laws (e.g., RICs). We agree--the rule 
is intended to apply to loans of money by banks and not to retail 
sales of goods under RICs.
    \18\ Although the OCC is confident that its rule provides a 
clear and simple test for determining who is the true lender, the 
agency recognizes that, on occasion, there may be additional 
circumstances in which its application is unclear. In these 
circumstances, banks with questions should contact the OCC.
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    Another commenter recommended that the OCC consider the ``safe 
harbor'' established in the recent settlement between the Colorado 
Attorney General and several financial institutions and fintech 
lenders.\19\ While we are aware of this settlement, the OCC believes 
that our approach achieves the goal of legal certainty while providing 
the necessary safeguards.
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    \19\ Assurance of Discontinuance, In re Avant of Colorado, LLC 
and Marlette Funding, LLC (Aug. 7, 2020), available at https://coag.gov/app/uploads/2020/08/Avant-Marlette-Colorado-Fully-Executed-AOD.pdf.
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    One commenter requested that the OCC expressly state in the final 
rule that the rulemaking is not intended to displace or alter other 
regulatory regimes, including those that address consumer protection. 
Another commenter requested that the OCC clarify how account 
information in true lender arrangements should be reported to consumer 
reporting agencies under the Fair Credit Reporting Act. As the preamble 
to the proposal noted, the OCC's rule does not affect the application 
of any federal consumer financial laws, including, but not limited to, 
the meaning of the terms (1) ``creditor'' in the Truth in Lending Act 
(15 U.S.C. 1601 et seq.) and Regulation Z (12 CFR part 1026) and (2) 
``lender'' in Regulation X (12 CFR part 1024), which implements the 
Real Estate Settlement Procedures Act of 1974 (12 U.S.C. 2601 et seq.). 
Similarly, the OCC's rule does not affect the applicability of the Home 
Mortgage Disclosure Act (12 U.S.C. 2801 et seq.), the Equal Credit 
Opportunity Act (15 U.S.C. 1691 et seq.), the Fair Credit Reporting Act 
(15 U.S.C. 1681 et seq.), or their implementing regulations (Regulation 
C (12 CFR part 1003), Regulation B (12 CFR part 1002), and Regulation V 
(12 CFR part 1022)), respectively. The OCC recommends that commenters 
direct questions regarding these statutes and regulations to the 
Consumer Financial Protection Bureau.
    Some commenters stated that the two prongs in the proposal's test 
would produce contradictory and absurd results. For example, several 
commenters noted that, under the proposal, two banks could be the true 
lender (e.g., at origination, one bank is named as the lender on the 
loan agreement and another bank funds the loan). In response to this 
comment, we have amended the regulatory text to provide that where one 
bank is named as the lender in the loan agreement and another bank 
funds the loan, the bank named as the lender in the loan agreement 
makes the loan. This approach will provide additional clarity and allow 
stakeholders, including borrowers, to easily identify the bank that 
makes the loan. Otherwise, the OCC adopts the regulatory text as 
proposed.

E. Rent-a-Charter Concerns; Supervisory Expectations

    The OCC received multiple comments expressing concern that the 
proposal would facilitate rent-a-charter relationships and thereby 
enable nonbank lenders to engage in predatory or otherwise abusive 
lending practices. These commenters noted that nonbanks are generally 
not subject to the type of prudential supervision that applies to banks 
and that usury caps are the most effective method to curb predatory 
lending by nonbanks. They argued that the OCC's rule would effectively 
nullify these caps and facilitate the expansion of predatory lending.
    As explained above, in a rent-a-charter arrangement, a lender 
receives a fee to rent out its charter and unique legal status to 
originate loans on behalf of a third party, enabling the third party to 
evade state and local laws, such as usury caps and other consumer 
protection laws. At the same time, the lender disclaims any 
responsibility for these loans. As a result of these arrangements, 
consumers can find themselves in debt to an unscrupulous nonbank lender 
that is subject to very little or no prudential supervision on a loan 
at an interest rate grossly in excess of the state usury cap.
    The OCC agrees that rent-a-charter schemes have no place in the 
federal financial system but disagrees that this rule facilitates such 
schemes. As noted above, instead, this proposal would help solve the 
problem by (1) providing a clear and simple test for determining when a 
bank makes a loan and (2) emphasizing the robust supervisory framework 
that applies to any loan made by a bank and to all third-party 
relationships to which banks are a party. As noted above, if a bank 
fails to satisfy its obligations under this supervisory framework, the 
OCC will use all the tools at its disposal, including its enforcement 
authority.\20\
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    \20\ Depending on the structure of the bank and the activities 
it conducts, other regulators may have oversight roles as well. For 
example, the Consumer Financial Protection Bureau has exclusive 
supervisory authority and primary enforcement authority for federal 
consumer financial laws for banks that are insured depository 
institutions and have assets greater than $10 billion. See 12 U.S.C. 
5515. The OCC generally has exclusive supervisory and enforcement 
authority for banks with assets of $10 billion or less. See 12 
U.S.C. 5516, 5581(c)(1)(B).
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    Although the proposal discussed this supervisory framework in 
detail, it bears repeating because of its importance to

[[Page 68746]]

this rulemaking. Every bank is responsible for establishing and 
maintaining prudent credit 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.\21\ Moreover, every bank is expected to have loan 
documentation practices that: (1) Enable the institution to make an 
informed lending decision and assess risk, as necessary, on an ongoing 
basis; (2) identify the purpose of a loan and the source of repayment 
and assess the ability of the borrower to repay the indebtedness in a 
timely manner; (3) ensure that any claim against a borrower is legally 
enforceable; (4) demonstrate appropriate administration and monitoring 
of a loan; and (5) take account of the size and complexity of a 
loan.\22\ Every bank should also have appropriate internal controls and 
information systems to assess and manage the risks associated with its 
lending activities, including those that provide for monitoring 
adherence to established policies and compliance with applicable laws 
and regulations, as well as internal audit systems.\23\
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    \21\ 12 CFR part 30, appendix A, II.D; see 12 CFR part 34, 
appendix A to subpart D.
    \22\ 12 CFR part 30, appendix A, II.C.
    \23\ 12 CFR part 30, appendix A, II.A and II.B.
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    In addition, a bank's lending must comply with all applicable laws 
and regulations, including federal consumer protection laws. For 
example, section 5 of the Federal Trade Commission Act (FTC Act) 
provides that ``unfair or deceptive acts or practices in or affecting 
commerce'' are unlawful.\24\ The Dodd-Frank Wall Street Reform and 
Consumer Protection Act also prohibits unfair, deceptive, or 
``abusive'' acts or practices.\25\ The OCC has taken a number of public 
enforcement actions against banks for violating section 5 of the FTC 
Act and will continue to exercise its enforcement authority to address 
unlawful actions.\26\
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    \24\ 15 U.S.C. 45; see also 12 CFR 7.4008(c), 34.3(c), part 30, 
appendix C. Further, OCC guidance directly addresses unfair or 
deceptive acts or practices with respect to banks. See OCC Advisory 
Letter 2002-3, ``Guidance on Unfair or Deceptive Acts or Practices'' 
(Mar. 22, 2002); OCC Advisory Letter 2003-2, ``Guidelines for 
National Banks to Guard Against Predatory and Abusive Lending 
Practices'' (Feb. 21, 2003); OCC Advisory Letter 2003-3, ``Avoiding 
Predatory and Abusive Lending Practices in Brokered and Purchased 
Loans'' (Feb. 21, 2003); and OCC Bulletin 2014-37, ``Risk Management 
Guidance: Consumer Debt Sales'' (Aug. 4, 2014).
    \25\ Public Law 111-203, tit. X, sections 1031 and 1036, 124 
Stat. 2005, 2010 (codified at 12 U.S.C. 5531 and 5536). The OCC 
recently issued a new booklet of the Comptroller's Handbook to 
provide guidance to examiners about the risks of banks and third 
parties engaging in lending, marketing, or other practices that may 
constitute unfair or deceptive acts or practices or unfair, 
deceptive, or abusive acts or practices. See Comptroller's Handbook, 
``Consumer Compliance, Unfair or Deceptive Acts or Practices and 
Unfair, Deceptive, or Abusive Acts or Practices'' (June 2020).
    \26\ See 12 U.S.C. 1818(b).
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    Banks also are subject to federal fair lending laws and may not 
engage in unlawful discrimination, such as ``steering'' a borrower to a 
higher cost loan on the basis of the borrower's race, national origin, 
age, or gender. If a bank engages in any unlawful discriminatory 
practices, the OCC will take appropriate action under the federal fair 
lending laws.\27\ Further, under the CRA regulations, CRA-related 
lending practices that violate federal fair lending laws, the FTC Act, 
or Home Ownership and Equity Protection Act, or that evidence other 
discriminatory or illegal credit practices, can adversely affect a 
bank's CRA performance rating.\28\
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    \27\ See 15 U.S.C. 1691; 42 U.S.C. 3601 et seq. As noted above, 
supra note 20, other regulators may have oversight roles as well and 
can be expected to take appropriate enforcement action to address 
unlawful action within their jurisdiction.
    \28\ See 12 CFR 25.17; 12 CFR part 25, appendix C, 12 CFR 
25.28(c).
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    The OCC has also taken significant steps to eliminate predatory, 
unfair, or deceptive practices in the federal banking system, 
recognizing that ``[s]uch practices are inconsistent with important 
national objectives, including the goals of fair access to credit, 
community development, and stable homeownership by the broadest 
spectrum of America.'' \29\ To address these concerns, the OCC requires 
banks engaged in lending to take into account the borrower's ability to 
repay the loan according to its terms.\30\ In the OCC's experience, ``a 
departure from fundamental principles of loan underwriting generally 
forms the basis of abusive lending: Lending without a determination 
that a borrower can reasonably be expected to repay the loan from 
resources other than the collateral securing the loan, and relying 
instead on the foreclosure value of the borrower's collateral to 
recover principal, interest, and fees.'' \31\
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    \29\ OCC Advisory Letter 2003-2.
    \30\ See, 12 CFR 7.4008(b), 34.3(b), part 30, appendix A, II.C.2 
and II.D.3.
    \31\ OCC Advisory Letter 2003-2, at 3.
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    Additionally, the OCC has cautioned banks about lending activities 
that may be considered predatory, unfair, or deceptive, noting that 
many such lending practices are unlawful under existing federal laws 
and regulations or otherwise present significant safety, soundness, or 
other risks. These practices include those that target prospective 
borrowers who cannot afford credit on the terms being offered, provide 
inadequate disclosures of the true costs and risks of transactions, 
involve loans with high fees and frequent renewals, or constitute loan 
``flipping'' (frequent re-financings that result in little or no 
economic benefit to the borrower that are undertaken with the primary 
or sole objective of generating additional fees).\32\ Policies and 
procedures should also be designed to ensure clear and transparent 
disclosure of the terms of the loan, including relative costs, risks, 
and benefits of the loan transaction, which helps to mitigate the risk 
that a transaction could be unfair or deceptive. The NPR also 
highlighted specific questions that the OCC evaluates as part of its 
robust supervision of banks' lending relationships.\33\
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    \32\ See OCC Advisory Letter 2000-7, ``Abusive Lending 
Practices'' (July 25, 2000); OCC Advisory Letter 2000-10, ``Payday 
Lending'' (Nov. 27, 2000); OCC Advisory Letter 2003-2; OCC Advisory 
Letter 2003-3; and OCC Bulletin 2014-37.
    \33\ See 85 FR at 44227.
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    In addition to this framework targeted at banks' lending 
activities, the OCC has issued comprehensive guidance on third-party 
risk management.\34\ These standards apply to any relationship between 
a bank and a third party, including lending relationships, regardless 
of which entity is the true lender. Pursuant to this guidance, the OCC 
expects banks to institute appropriate safeguards to manage the risks 
associated with their third-party relationships.
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    \34\ See, e.g., OCC Bulletin 2013-29, ``Third-Party 
Relationships: Risk Management Guidance'' (Oct. 30, 2013); OCC 
Bulletin 2020-10, ``Third-Party Relationships: Frequently Asked 
Questions to Supplement OCC Bulletin 2013-29'' (Mar. 5, 2020).
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    Under the final rule, this robust supervisory framework will 
continue to apply to banks that are the true lender in a lending 
relationship with a third party. Rather than allowing banks to enter 
into rent-a-charter schemes, the final rule will ensure that banks 
understand that the OCC will continue

[[Page 68747]]

to hold banks accountable for their lending activities.

IV. Regulatory Analyses

    Paperwork Reduction Act. In accordance with the requirements of the 
Paperwork Reduction Act of 1995 (PRA), 44 U.S.C. 3501 et seq., the OCC 
may not conduct or sponsor, and respondents are not required to respond 
to, an information collection unless it displays a currently valid 
Office of Management and Budget (OMB) control number. The OCC has 
reviewed the final rule and determined that it will not introduce any 
new or revise any existing collection of information pursuant to the 
PRA. Therefore, no submission will be made to OMB for review.
    Regulatory Flexibility Act. The Regulatory Flexibility Act (RFA), 5 
U.S.C. 601 et seq., requires an agency, in connection with a final 
rule, to prepare a Final Regulatory Flexibility Analysis describing the 
impact of the rule on small entities (defined by the Small Business 
Administration (SBA) for purposes of the RFA to include commercial 
banks and savings institutions with total assets of $600 million or 
less and trust companies with total assets of $41.5 million or less) or 
to certify that the final rule would not have a significant economic 
impact on a substantial number of small entities.
    The OCC currently supervises approximately 745 small entities. The 
OCC expects that all of these small entities would be impacted by the 
rule. While this final rule could affect how banks structure their 
current or future third-party relationships as well as the amount of 
loans originated by banks, the OCC believes the costs associated with 
any administrative changes in bank lending policies and procedures 
would be de minimis. Banks already have systems, policies, and 
procedures in place for issuing loans when third parties are involved. 
It takes significantly less time to amend existing policies than to 
create them, and the OCC does not expect any needed adjustments will 
involve an extraordinary demand on a bank's human resources. In 
addition, any costs would likely be absorbed as ongoing administrative 
expenses. Therefore, the OCC certifies that this rule will not have a 
significant economic impact on a substantial number of small entities. 
Accordingly, a Final Regulatory Flexibility Analysis is not required.
    Unfunded Mandates Reform Act. Consistent with the Unfunded Mandates 
Reform Act of 1995 (UMRA), 2 U.S.C. 1532, the OCC considers whether a 
final rule includes a federal mandate that may result in the 
expenditure by state, local, and tribal governments, in the aggregate, 
or by the private sector, of $100 million adjusted for inflation 
(currently $157 million) in any one year. The final rule does not 
impose new mandates. Therefore, the OCC concludes that implementation 
of the final rule would not result in an expenditure of $157 million or 
more annually by state, local, and tribal governments, or by the 
private sector.
    Riegle Community Development and Regulatory Improvement Act. 
Pursuant to section 302(a) of the Riegle Community Development and 
Regulatory Improvement Act of 1994 (RCDRIA), 12 U.S.C. 4802(a), in 
determining the effective date and administrative compliance 
requirements for new regulations that impose additional reporting, 
disclosure, or other requirements on insured depository institutions, 
the OCC must consider, consistent with principles of safety and 
soundness and the public interest, any administrative burdens that such 
regulations would place on depository institutions, including small 
depository institutions, and customers of depository institutions, as 
well as the benefits of such regulations. In addition, section 302(b) 
of RCDRIA, 12 U.S.C. 4802(b), requires new regulations and amendments 
to regulations that impose additional reporting, disclosures, or other 
new requirements on insured depository institutions generally to take 
effect on the first day of a calendar quarter that begins on or after 
the date on which the regulations are published in final form. This 
final rule imposes no additional reporting, disclosure, or other 
requirements on insured depository institutions, and therefore, section 
302 is not applicable to this rule.
    Congressional Review Act. For purposes of the Congressional Review 
Act (CRA), 5 U.S.C. 801 et seq., the Office of Information and 
Regulatory Affairs (OIRA) of the OMB determines whether a final rule is 
a ``major rule,'' as that term is defined at 5 U.S.C. 804(2). OIRA has 
determined that this final rule is not a major rule. As required by the 
CRA, the OCC will submit the final rule and other appropriate reports 
to Congress and the Government Accountability Office for review.
    Administrative Procedure Act. The APA, 5 U.S.C. 551 et seq., 
generally requires that a final rule be published in the Federal 
Register not less than 30 days before its effective date. This final 
rule will be effective 60 days after publication in the Federal 
Register, which meets the APA's effective date requirement.

List of Subjects in 12 CFR Part 7

    Computer technology, Credit, Derivatives, Federal savings 
associations, Insurance, Investments, Metals, National banks, Reporting 
and recordkeeping requirements, Securities, Security bonds.

Office of the Comptroller of the Currency

    For the reasons set out in the preamble, the OCC amends 12 CFR part 
7 as follows.

PART 7--ACTIVITIES AND OPERATIONS

0
1. The authority citation for part 7 continues to read as follows:

    Authority: 12 U.S.C. 1 et seq., 25b, 29, 71, 71a, 92, 92a, 93, 
93a, 95(b)(1), 371, 371d, 481, 484, 1463, 1464, 1465, 1818, 1828(m) 
and 5412(b)(2)(B).


0
2. Add Sec.  7.1031 to read as follows:


Sec.  7.1031  National banks and Federal savings associations as 
lenders.

    (a) For purposes of this section, bank means a national bank or a 
Federal savings association.
    (b) For purposes of sections 5136 and 5197 of the Revised Statutes 
(12 U.S.C. 24 and 12 U.S.C. 85), section 24 of the Federal Reserve Act 
(12 U.S.C. 371), and sections 4(g) and 5(c) of the Home Owners' Loan 
Act (12 U.S.C. 1463(g) and 12 U.S.C. 1464(c)), a bank makes a loan when 
the bank, as of the date of origination:
    (1) Is named as the lender in the loan agreement; or
    (2) Funds the loan.
    (c) If, as of the date of origination, one bank is named as the 
lender in the loan agreement for a loan and another bank funds that 
loan, the bank that is named as the lender in the loan agreement makes 
the loan.

Brian P. Brooks,
Acting Comptroller of the Currency.
[FR Doc. 2020-24134 Filed 10-29-20; 8:45 am]
BILLING CODE 4810-33-P