Dive Brief:

• A bank will be the "true lender" on loans made in partnership with fintechs if, as of the origination date, it funds the loan or is named the lender in the loan agreement, the Office of the Comptroller of the Currency (OCC) clarified Tuesday in a final rule.
• Further, if one bank is named the lender in the loan agreement and another bank funds the loan, the former is the true lender, the OCC specified.
• The clarification gives banks the burden of ensuring a loan complies with consumer protection laws.

Dive Insight:

The rule is meant to address concerns surrounding "rent-a-charter" agreements in which fintechs partner with national banks to get around state interest rate caps attached to lending. Tuesday's rule means such state caps do not apply.

Acting Comptroller Brian Brooks said in a statement Tuesday the OCC's rule "supports healthy markets, promotes access to credit, and protects against harmful 'rent-a-bank' arrangements."

However, consumer advocates such as the National Consumer Law Center (NCLC) said the rule enables fintechs to duck responsibility.

"Today's rule takes us back to the time 20 years ago, when payday lenders were evading state interest rate caps merely by putting a bank's name on the paperwork," Lauren Saunders, the NCLC's associate director, said Tuesday in a statement.

The "true lender" concept has already played out in legal disputes between states and lenders. Colorado's attorney general settled in August with online lenders Avant and Marlette Funding and their partner banks, Cross River Bank and WebBank, after suing the four companies in 2017 on claims that Avant and Marlette were charging interest and fees above what the state law allows. Although Cross River and WebBank can export the interest rate caps of their home states, Colorado argued Avant and Marlette were the true lenders because they held the predominant economic interest.

Under the settlement, regulators must be able to examine, review and audit the online lender, and the bank retains the right to approve or deny loans and must control all terms of credit. The companies agreed to pay $1.05 million altogether and make a $500,000 contribution to a state program supporting K-12 financial education.

Avant and Marlette have since excluded Colorado loans from new securitizations, and WebBank has stopped originating loans in Colorado.

The settlement may serve as a model for other states to institute consumer safeguards.

However, Saunders said she expected Tuesday's OCC rule will prompt more legal action.

"The OCC has already been sued by state attorneys general for its first attempt to protect predatory rent-a-bank lenders, and I expect the agency will be sued once again over this rule, which far exceeds the OCC's authority to take away states' power to protect people from predatory lending," Saunders said.

That first attempt is the OCC's valid-when-made doctrine, a May rule reinforcing that a loan's interest rate can remain intact even after the loan is bought by a company based in a state with a lower rate cap.

Lawmakers have asked other regulators to "heighten [their] vigilance" in monitoring bank-fintech lending partnerships. Rep. Katie Porter, D-CA, sent a letter last December asking Federal Deposit Insurance Corp. (FDIC) Chairman Jelena McWilliams to look into comments from several high-interest-rate lenders indicating to investors they may partner with out-of-state banks to avoid California's newly passed 36% interest rate cap.