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Financial Outsourcing Solutions


FOS Blog

04 Feb

Are you the “True Lender”?


The court ruled in the “Madden” case that the assignee of a loan made by a national bank or federal savings association may charge the same interest rate that the bank or savings association is authorized to charge.  But how do you determine who is actually the “true lender”?  That question was not answered in court.

On October 27, 2020 the OCC issued a final “True Lender” rule that establishes clear guidance when there is a partnership between a bank and a third party as to who the true lender is.  It provides two tests. A bank is a true lender if, as of the date of origination, it (1) is named as the lender in the loan agreement or (2) funds the loan.  But what if one bank is named as the lender but another bank funds the loan?  Then the bank that is named as the lender in loan documents makes the loan.  The purpose of the rule is to avoid “rent-a-charter” lending schemes where a bank receives a fee from a third party for the use of its name.

They specifically excluded certain lending scenarios:

  • When a bank purchases loan contracts from an auto dealer, it is not funding the loan.
  • When the bank provides a “warehouse loan” where the third party draws on the loan to lend to other borrowers, the bank is not funding the third-party loans.

On the contrary, in table funding, the bank is the true lender because it advances funds at loan origination.

As banks embrace more Fintech and non-bank lending relationships, perhaps it’s time for you to evaluate your lending relationships to assure you are still the “true lender.”  Guidance that was issued by the Financial Stability Oversight Council on December 20, 2019 on supervision of non-bank financial companies may help you.

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