OCC seeks to clarify oversight of third-party lending relationships

WASHINGTON — The Office of the Comptroller of the Currency has issued a proposal to further clarify how lending relationships between national banks and third parties are regulated.

The intent is to make it easier for banks to use such relationships to “facilitate affordable access to credit,” according to the proposal, which the OCC released Monday.

Banks often sell loans to third parties to manage risk and fund additonal lending. But the current legal framework has created uncertainty as to which party is the “true lender,” which affects how the OCC supervises the lending relationship, the proposal says.

Under the plan, a true lender is the entity named as the official lender at a loan’s origination date or the entity that funds the loan on the origination date. When a national bank is the true lender, the OCC is the prudential regulator of the activities in question.

"If the bank makes the loan in the context of a relationship with a third party, the OCC ensures that the bank has instituted appropriate safeguards to manage the associated risks," the proposal says. "In contrast, if a third party makes a loan as part of a relationship with a bank, the OCC is not the prudential regulator of the lending activity, though it still assesses the bank’s third-party risk management in connection with the relationship itself."

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Lack of clarity on regulatory oversight "may discourage banks and third parties from entering into relationships, limit competition, and chill the innovation that results from these partnerships — all of which may restrict access to affordable credit,” the proposal says.

The proposal was issued almost two months after the OCC finalized a workaround of a 2015 court decision, Madden v. Midland Funding, that limited banks’ ability to sell off loans. That rule clarified that a loan's interest rate can remain legally intact even after the loan is acquired by a purchaser in a state with a lower rate cap.

The OCC said the new proposal would “operate together” with its workaround of the Madden decision.

“Once it is determined that a loan has, in fact, been made by a bank under the clear standards set out in this proposal, the applicable federal legal framework (1) determines the interest permitted on the loan … and (2) permits the loan to be subsequently sold, assigned, or otherwise transferred without affecting the interest term, pursuant to the Madden-fix rule,” the proposal says.

The OCC will accept comments on the proposal on or before Sept. 3.