Online lenders continue to be plagued by “true lender” lawsuits that challenge whether the named lender in loans made through a partnership between a nonbank lender and a regulated bank is actually an artifice in a “rent-a-bank” scheme.
In such lawsuits, the plaintiff indirectly alleges that the bank is not the lender by arguing that the nonbank, which typically markets, services and invests in loans made under the program, is in fact the true lender. Because the nonbank lacks the legal ability to charge the rate of interest being assessed by the bank, the result of a successful true lender lawsuit is that the loans are deemed unlawful and unenforceable.
The objective in such cases is to unmask the nonbank party to a loan program relationship as, in other words, a “wolf in sheep’s clothing.”
The resulting legal uncertainty dissuades the vast majority of banks from engaging in such programs, which have the potential to expand the availability of credit to underserved borrowers. The uncertainty concentrates such programs into a relative handful of banks, driving the already high costs of such loans still higher.
The good news is that a potential means for ending this problem already exists. Federal bank agency opinions that were issued 18 years ago in connection with then-newly authorized interstate branch banking could be used to clarify the issue.
The complaint in a true lender lawsuit usually makes no allegations against the bank, for which the challenged interest charges would be lawful. Rather, the allegation that the bank is not the actual lender is implied from the contentions that the nonbank made the loans.
If the plaintiffs in a true lender lawsuit were to directly challenge whether the named bank lender actually made the loans, the bank would likely prevail based on the interpretations of the National Bank Act set forth in the Office of the Comptroller of the Currency’s Interpretative Letter 822 or the Federal Deposit Insurance Act in the Federal Deposit Insurance Corp.’s General Counsel Opinion No. 11.
The OCC issued Interpretative Letter 822 on February 17, 1998, in response to the Neal-Riegle Interstate Banking Act of 1994, which both brought about interstate branch banking and created the possibility that a national bank could be subject to the usury laws of more than its home state. The OCC opined in Interpretative Letter 822 that it would be would be “nonsensical” for a national bank to be expected to engage in a nationwide lending business “without a reference point for determining appropriate state interest rate law.”
As a result, it created a three-part test in the letter for conclusively determining where a national bank is “located” when it makes a loan. This same test was adopted by the FDIC several months later in its opinion.
Under the three-part test, the activity of making a loan is boiled down to just three primary activities: the decision to approve the loan, the communication of the approval decision and the physical disbursal of the proceeds. If any one of these activities takes place in the bank’s home state, the loan is considered to have been made in that state and the bank may choose to charge its home state’s interest rates to all borrowers, irrespective of state of residence.
By conclusively determining where a loan is made in an easy-to-apply manner, the three-part test brought interest-rate certainty to bank lending conducted through branches.
As a general rule, the fact that a bank subcontracts marketing, loan servicing or other “ministerial,” or nonessential, lending activities to third-party service providers has no effect on the bank’s ability to export its home state’s interest rate under federal law. To this end, the Bank Service Company Act expressly authorizes banks to utilize the services of third-parties. In short, under the federal banking laws, there is no “tipping point” beyond which a servicer becomes the lender in lieu of the bank — so long as the bank remains the party that is performing the primary, or “non-ministerial,” lending activities laid out in the three-part test, the bank is the only lender.
Yet federal bank agency guidance is silent regarding true lender risk, despite the growing number of states in which such lawsuits have arisen. The FDIC published draft third-party lending guidance in July 2016 that had the potential to provide some clarity, but it is still pending. Moreover, the guidance merely observes in a footnote that “courts are divided on whether third-parties may avail themselves of such preemption.”
As to whether a bank’s status as the lender could be undermined by its use of agents, the guidance says nothing. This silence is problematic because, as things stand, one could evaluate the facts of the same loan program and reach opposite conclusions with respect to the program’s status under usury laws depending on whether federal interest rate preemption rules or judge-made, state true lender rules are applied.
In drafting the 1998 guidance, the OCC’s goal was to avoid having the interest rate exportation rule of the National Bank Act, which is essentially mirrored in the Federal Deposit Insurance Act, “interpreted so as to throw into confusion the complex system of modern interest banking.”
Such confusion results whenever state authorities create or adopt legal tests for determining when, where and by whom loans are made that contradict federal banking agency interpretations of federal law.
The OCC or FDIC could presumably put a stop to this ongoing uncertainty by asserting that as a matter of federal law, the bank is the sole lender when the bank is named as the lender in the loan documents, and when the agencies’ three-part test is satisfied.
Regulators have the tools they need to end this legal uncertainty, if they so choose.
