[Federal Register Volume 85, Number 141 (Wednesday, July 22, 2020)]
[Proposed Rules]
[Pages 44223-44228]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-15997]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
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 

  Federal Register / Vol. 85, No. 141 / Wednesday, July 22, 2020 / 
Proposed Rules  

[[Page 44223]]



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: Notice of proposed rulemaking.

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SUMMARY: The Office of the Comptroller of the Currency (OCC) is 
proposing a regulation to determine when a national bank or Federal 
savings association (bank) makes a loan and is the ``true lender'' in 
the context of a partnership between a bank and a third party, such as 
a marketplace lender. Under this proposal, 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: Comments must be received on or before September 3, 2020.

ADDRESSES: Commenters are encouraged to submit comments through the 
Federal eRulemaking Portal or email, if possible. Please use the title 
``National Banks and Federal Savings Associations as Lenders'' to 
facilitate the organization and distribution of the comments. You may 
submit comments by any of the following methods:
     Federal eRulemaking Portal--Regulations.gov Classic or 
Regulations.gov Beta.
    Regulations.gov Classic: Go to https://www.regulations.gov/. Enter 
``Docket ID OCC-2020-0026'' in the Search Box and click ``Search.'' 
Click on ``Comment Now'' to submit public comments. For help with 
submitting effective comments, please click on ``View Commenter's 
Checklist.'' Click on the ``Help'' tab on the Regulations.gov home page 
to get information on using Regulations.gov, including instructions for 
submitting public comments.
    Regulations.gov Beta: Go to https://beta.regulations.gov/ or click 
``Visit New Regulations.gov Site'' from the Regulations.gov classic 
homepage. Enter ``Docket ID OCC-2020-0026'' in the Search Box and click 
``Search.'' Public comments can be submitted via the ``Comment'' box 
below the displayed document information or click on the document title 
and click the ``Comment'' box on the top-left side of the screen. For 
help with submitting effective comments, please click on ``Commenter's 
Checklist.'' For assistance with the Regulations.gov Beta site, please 
call (877)-378-5457 (toll free) or (703) 454-9859 Monday-Friday, 9 
a.m.-5 p.m. ET or email to [email protected].
     Email: [email protected].
     Mail: Chief Counsel's Office, Attention: Comment 
Processing, Office of the Comptroller of the Currency, 400 7th Street 
SW, Suite 3E-218, Washington, DC 20219.
     Hand Delivery/Courier: 400 7th Street SW, Suite 3E-218, 
Washington, DC 20219.
     Fax: (571) 465-4326.
    Instructions: You must include ``OCC'' as the agency name and 
``Docket ID OCC-2020-0026'' in your comment. In general, the OCC will 
enter all comments received into the docket and publish the comments on 
the Regulations.gov website without change, including any business or 
personal information provided such as name and address information, 
email addresses, or phone numbers. Comments, including attachments and 
other supporting materials, are part of the public record and subject 
to public disclosure. Do not include any information in your comment or 
supporting materials that you consider confidential or inappropriate 
for public disclosure.
    You may review comments and other related materials that pertain to 
this rulemaking action by any of the following methods:
     Viewing Comments Electronically--Regulations.gov Classic 
or Regulations.gov Beta: Regulations.gov Classic: Go to https://www.regulations.gov/. Enter ``Docket ID OCC-2020-0026'' in the Search 
box and click ``Search.'' Click on ``Open Docket Folder'' on the right 
side of the screen. Comments and supporting materials can be viewed and 
filtered by clicking on ``View all documents and comments in this 
docket'' and then using the filtering tools on the left side of the 
screen. Click on the ``Help'' tab on the Regulations.gov home page to 
get information on using Regulations.gov. The docket may be viewed 
after the close of the comment period in the same manner as during the 
comment period. Regulations.gov Beta: Go to https://beta.regulations.gov/ or click ``Visit New Regulations.gov Site'' from 
the Regulations.gov classic homepage. Enter ``Docket ID OCC 2020-0026'' 
in the Search Box and click ``Search.'' Click on the ``Comments'' tab. 
Comments can be viewed and filtered by clicking on the ``Sort By'' 
drop-down on the right side of the screen or the ``Refine Results'' 
options on the left side of the screen. Supporting Materials can be 
viewed by clicking on the ``Documents'' tab and filtered by clicking on 
the ``Sort By'' drop-down on the right side of the screen or the 
``Refine Results'' options on the left side of the screen.'' For 
assistance with the Regulations.gov Beta site please call (877) 378-
5457 (toll free) or (703) 454-9859 Monday-Friday, 9a.m.-5p.m. ET or 
email to [email protected]. The docket may be viewed 
after the close of the comment period in the same manner as during the 
comment period.

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. Introduction

    The U.S. economy relies on access to affordable credit to fuel 
economic growth and job creation. Americans rely on affordable credit 
to reach goals large and small, ranging from purchasing consumer goods, 
cars, and homes to starting or growing small businesses. While national 
banks and Federal savings associations (banks) play a critical role in 
supplying this credit, the financial system is most efficient when 
banks work effectively with other market participants to meet 
customers'

[[Page 44224]]

credit needs. These relationships allow banks to manage their risks and 
leverage their balance sheets to increase the supply of available 
credit in ways they would not be able to if they were acting alone.
    One way that banks achieve this efficiency is by selling loans to 
third parties and using the proceeds from these sales to make 
additional loans.\1\ For example, credit card securitization allows a 
bank to originate very large loan pools for a diverse customer base at 
lower rates than if the bank had to fund the loans on its balance 
sheet.\2\ By removing the assets and supporting debt from its balance 
sheet, the bank is able to save some of the costs of on-balance-sheet 
financing and manage potential asset-liability mismatches and credit 
concentrations.\3\ Bank customers benefit from the increased 
availability of credit these securitization relationships provide.\4\
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    \1\ Conversely, banks may invest in loans made by third parties, 
which provides the third parties with additional capital to make new 
loans.
    \2\ Office of the Comptroller of the Currency, Comptroller's 
Handbook, ``Asset Securitization'' at 5 (Nov. 1997).
    \3\ Id. at 2.
    \4\ Id. at 4-5.
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    Lending relationships with third parties can also help banks meet 
customers' need for affordable credit, including the needs of unbanked 
or underbanked individuals.\5\ For example, these relationships can 
enable banks to market affordable loan products to a wider range of 
potential customers or to develop or acquire innovative credit 
underwriting models that facilitate expanded access to credit. Banks 
can also work with third parties to develop responsible lending 
programs to help customers meet credit needs, including small-dollar 
lending programs designed to assist with cash-flow imbalances, 
unexpected expenses, or income shortfalls.\6\
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    \5\ Many relationships between banks and third parties address 
core banking functions other than lending (i.e., making payments and 
taking deposits). See, e.g., 12 CFR 5.20(e). However, relationships 
that do not involve making loans are beyond the scope of this 
rulemaking. In addition, for purposes of this rulemaking, references 
to partnerships are not limited to legal partnerships and include a 
variety of other arrangements through which banks can work with 
third parties. This rulemaking uses the terms partnership and 
relationship interchangeably.
    \6\ See Interagency Lending Principles for Offering Responsible 
Small-Dollar Loans (May 2020); Joint Statement Encouraging 
Responsible Small-Dollar Lending in Response to COVID-19 (Mar. 
2020).
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    While these lending relationships can be effective tools to 
facilitate affordable access to credit, there has been increasing 
uncertainty about the legal framework that applies to the loans made as 
part of these relationships. This uncertainty 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.
    Federal law authorizes banks to enter into contracts, to make 
loans, and to subsequently transfer these loans and assign loan 
contracts.\7\ These statutes, however, do not specifically address 
which entity makes a loan (or, in the vernacular commonly used in case 
law, which entity is the ``true lender'') and, therefore, what legal 
framework applies, when the loan is originated as part of a lending 
relationship between a bank and a third party. Furthermore, the OCC has 
not previously taken regulatory action to resolve this ambiguity. In 
the absence of regulatory action, courts are left to determine when, in 
a lending partnership, a bank is making the loan and when its partner 
makes the loan.
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    \7\ 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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    A growing body of case law has introduced divergent standards for 
resolving this issue. In some cases, the court has concluded that the 
form of the transaction alone resolves this issue.\8\ Under this 
analysis, the lender is the entity named in the loan agreement.
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    \8\ See, e.g., Beechum v. Navient Solutions, Inc., No. EDCV 15-
8239-JGB-KKx, 2016 WL 5340454, at *8 (C.D. Cal. Sept. 20, 2016) 
(holding that the court will look ``only to the face of the 
transactions at issue'').
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    In other cases, the courts have applied fact-intensive balancing 
tests,\9\ in which they have considered a multitude of factors, 
including: (1) How long the entity named as the lender holds the loan 
before selling it to the third party; \10\ (2) whether the third party 
advances money that the named lender draws on to make loans; \11\ (3) 
whether the third party guarantees minimum payments or fees to the 
named lender; \12\ (4) whether the third party agrees to indemnify the 
named lender; \13\ and (5) how loans are treated for financial 
reporting purposes.\14\ 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.\15\ These fact-intensive inquiries, coupled with the 
lack of a uniform and predictable standard, increase the subjectivity 
in determining who is the true lender and undermine banks' ability to 
partner with third parties to lend across jurisdictions on a nationwide 
basis.
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    \9\ See, e.g., CFPB v. CashCall, Inc., No. CV 15-7522-JFW, 2016 
WL 4820635, at *5-*6 (C.D. Cal. Aug. 31, 2016) (examining ``which 
party or entity has the predominant economic interest in the 
transaction,'' including by evaluating which party placed its money 
at risk).
    \10\ Id. at *6 (concluding that the third party was the true 
lender, including because ``[a]lthough [the third party] waited a 
minimum of three days after the funding of each loan before 
purchasing it, it is undisputed that [the third party] purchased 
each and every loan before any payments on the loan had been 
made.''); CashCall, Inc. v. Morrisey, No. 12-1274, 2014 WL 2404300, 
at *1, *7 (W.Va. May 30, 2014) (noting that the third party 
purchased loans within three days of origination but not clearly 
indicating whether this fact was considered as part of the 
predominant economic interest analysis); Sawyer v. Bill Me Later, 
Inc., 23 F. Supp. 3d 1359, 1369 (D. Utah 2014) (noting that the 
named lender was the real party in interest, including because it 
``holds the credit receivables for two days'').
    \11\ See, e.g., CFPB v. CashCall, 2016 WL 4820635, at *6 (``It 
is undisputed that [the third party] deposited enough money into a 
reserve account to fund two days of loans, calculated on the 
previous month's daily average and that [the named lender] used this 
money to fund consumer loans.'').
    \12\ See, e.g., id. at *2 (``[The third party] guaranteed [the 
named lender] a minimum payment of $100,000 per month, as well as a 
$10,000 monthly administrative fee.'').
    \13\ See, e.g., id. at *3 (``[The third party] agreed to `fully 
indemnify [the named lender] for all costs arising or resulting from 
any and all civil, criminal or administrative claims or actions . . 
. .' ''); CashCall v. Morrisey, 2014 WL 2404300, at *7 (noting that 
the Circuit Court found that the third party agreed to indemnify the 
named lender).
    \14\ CashCall v. Morrisey, 2014 WL 2404300, at *7 (noting that 
loans were treated as if they were funded by the third party for 
financial reporting purposes).
    \15\ Compare CFPB v. CashCall, 2016 WL 4820635, with CashCall v. 
Morrisey, 2014 WL 2404300.
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    As a result of this legal uncertainty, stakeholders cannot reliably 
determine which entity makes a loan, and therefore, the applicability 
of key aspects of the legal framework as of the date of origination is 
unclear. For example, Federal law establishes the interest a bank may 
charge on any loan it makes and authorizes the bank to export that rate 
from the state in which it is located to borrowers in other states.\16\ 
While the OCC recently clarified that interest permissible on a loan 
made by a bank is not affected by the subsequent sale, assignment, or 
other transfer of the loan,\17\ uncertainty remains regarding how to 
determine if a loan is, in fact, made by a bank as opposed to by its 
relationship partner.
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    \16\ See 12 U.S.C. 85, 1463(g); 12 CFR 7.4001, 160.110.
    \17\ 12 CFR 7.4001(e), 160.110(d) (effective Aug. 3, 2020); 
Permissible Interest on Loans That Are Sold, Assigned, or Otherwise 
Transferred, 85 FR 33,530 (June 2, 2020) (Madden-fix rule).
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    To address this uncertainty, the OCC is proposing a clear test to 
determine when a bank makes a loan. In doing so, the OCC is fulfilling 
its responsibility to resolve ambiguities in the Federal banking laws 
it is charged with administering and ensuring clarity and

[[Page 44225]]

uniformity for the banks it supervises.\18\ The OCC's proposed rule 
would enable banks to fully exercise the lending authority granted to 
them under Federal law and allow stakeholders to reliably and 
consistently identify key aspects of the legal framework applicable to 
a loan. When a bank makes a loan, a robust Federal framework applies to 
ensure that banks are lending in a safe and sound manner and in 
compliance with applicable laws and regulations, and the OCC is the 
prudential regulator of the bank's lending activities. Additionally, 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.\19\ 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.\20\
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    \18\ 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 12 U.S.C. 93a (OCC authority to 
prescribe rules and regulations).
    \19\ 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).
    \20\ See supra note 19.
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II. Description of the Proposal

    Several provisions of Federal banking law grant banks the authority 
to make loans. Specifically, section 5136 of the Revised Statutes (12 
U.S.C. 24) provides that a national bank may engage in the business of 
banking, including by ``loaning money.'' Section 24 of the Federal 
Reserve Act (12 U.S.C. 371) states that a national bank may ``make . . 
. loans,'' and section 5(c) (12 U.S.C. 1464(c)) of the Home Owners' 
Loan Act states that a Federal savings association may ``invest in, 
sell, or otherwise deal in . . . loans.'' Although each statute uses 
slightly different language to authorize banks to extend credit, none 
describes how to determine when a bank has, in fact, exercised this 
authority, and when, by contrast, the bank's relationship partner has 
made the loan. In light of this statutory ambiguity, the OCC has 
concluded, for the reasons set forth below, that it is reasonable to 
interpret these statutes to provide that a bank makes a loan whenever 
it, as of the date of origination, (1) is named as the lender in the 
loan agreement or (2) funds the loan.\21\
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    \21\ This proposal also interprets 12 U.S.C. 85 and 1463(g), 
which govern the interest permitted on bank loans. This proposal 
would not, however, affect the application of Federal consumer 
financial laws. For example, this proposal would not affect the 
meaning of the term ``creditor'' as used in the Truth in Lending 
Act, 15 U.S.C. 1601 et seq., and Regulation Z, 12 CFR part 1026, or 
the term ``lender'' as defined in Regulation X, 12 CFR part 1024.
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    If a bank is named in the loan agreement as the lender as of the 
date of origination, the OCC views this imprimatur as conclusive 
evidence that the bank is exercising its authority to make loans 
pursuant to the statutes cited above and has elected to subject itself 
to the panoply of applicable Federal laws and regulations (including 
but not limited to consumer protection laws) governing lending by 
banks.\22\
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    \22\ See Beechum, 2016 WL 5340454; Lender, Black's Law 
Dictionary (11th ed. 2019) (``A person or entity from which 
something (esp. money) is borrowed.'').
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    There are also circumstances in which a bank is not named as the 
lender in the loan agreement but is still, in the OCC's view, making 
the loan.\23\ To ensure that the OCC's rule would capture these 
circumstances, the agency is proposing a second standard based on which 
party funded the loan. Under this standard, if a bank funds a loan as 
of the date of origination, the OCC concludes that it has a predominant 
economic interest in the loan and, therefore, has made the loan--
regardless of whether it is the named lender in the loan agreement as 
of the date of origination.\24\ Under the OCC's proposal, the 
determination of which entity made the loan under the above standards 
would be complete as of the date the loan is originated and would not 
change, even if the bank were to subsequently transfer the loan.\25\
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    \23\ See, e.g., OCC Interpretive Letter 1002 (May 13, 2004) 
(discussing ``table funding'' arrangements).
    \24\ As discussed previously, while courts have relied on a 
multitude of factors to evaluate which party has the predominant 
economic interest in a loan, the OCC believes that such a fact-
specific analysis is unnecessarily complex and unpredictable.
    \25\ See, e.g., supra note 17 and accompanying text.
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    Therefore, the OCC proposes that, 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) the Home Owners' Loan Act (12 U.S.C. 1463(g) and 12 U.S.C. 
1464(c)), a bank makes a loan when, as of the date of origination, it 
(1) is named as lender in the loan agreement or (2) funds the loan.
    The OCC invites comments on all aspects of this proposal, including 
whether there are additional lending arrangements that should be 
captured by the OCC's standards for determining when a bank makes a 
loan and whether the proposed standards would capture lending 
arrangements that should be excluded.\26\
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    \26\ The OCC is also considering how the two standards interact 
and may revise its test if this interaction creates challenges in 
determining which party makes a loan.
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III. Consequences of the Bank as Lender

    A key objective of this proposal is to provide regulatory clarity 
and certainty that would enable banks and their partners to lend in a 
manner consistent with their business objectives and risk appetite and 
in compliance with applicable laws and regulations. As noted 
previously, identifying the lender would pinpoint key elements of the 
statutory, regulatory, and supervisory framework applicable to the loan 
in question. Specifically, when a bank makes a loan, it is responsible 
for ensuring that the loan is made both in a safe and sound manner and 
in accordance with applicable laws and regulations, even if the loan is 
made in the context of a third-party partnership and even if the bank's 
partner is the customer-facing entity.\27\ As the bank's prudential 
regulator, the OCC directly supervises these lending activities.\28\ 
The OCC also ensures that the bank has instituted appropriate 
safeguards to manage the risks associated with the partnership.
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    \27\ As the OCC has previously stated, ``[a] bank's use of third 
parties does not diminish the responsibility of its board of 
directors and senior management to ensure that the activity is 
performed in a safe and sound manner and in compliance with 
applicable laws.'' OCC Bulletin 2013-29. But see supra note 21.
    \28\ 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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    While the OCC's prudential oversight of bank lending is 
multifaceted, it includes ensuring that the bank has prudent 
underwriting standards and loan documentation policies and procedures. 
In this regard, the OCC expects all banks to establish and maintain 
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

[[Page 44226]]

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.\29\ Moreover, banks are also 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.\30\ A bank should also have appropriate 
internal controls and information systems to assess and manage the 
risks associated with its lending activities, including monitoring 
adherence to established policies, as well as internal audit 
systems.\31\
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    \29\ 12 CFR part 30, appendix A, Sec.  II.D; see 12 CFR part 34, 
appendix A to subpart D.
    \30\ 12 CFR part 30, appendix A, Sec.  II.C.
    \31\ Id. at Sec. Sec.  II.A and II.B.
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    In addition, a bank's lending must be done in compliance with other 
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.\32\ The Dodd-Frank Wall Street 
Reform and Consumer Protection Act also prohibits unfair, deceptive, or 
``abusive'' acts or practices.\33\ 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.\34\ The OCC has taken a number of public enforcement actions 
against banks for violating section 5 of the FTC Act, including for 
failure to: (1) Provide sufficient information to allow consumers to 
understand the terms of the product or service being offered; (2) 
adequately disclose when significant fees or similar material 
prerequisites are imposed in order to obtain the particular product or 
service being offered; and (3) adequately disclose material limitations 
affecting the product or service being offered.\35\ The agency will 
continue to exercise its enforcement authority to address unlawful 
actions.
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    \32\ 15 U.S.C. 45(a)(1), 45(n). OCC regulations regarding non-
real estate and real estate lending, as well as the OCC's 
enforceable ``Guidelines Establishing Standards for Residential 
Mortgage Lending Practices,'' expressly reference the FTC Act 
standards. See 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).
    \33\ Public Law 111-203, tit. X, sections 1031 and 1036, 124 
Stat. 2005, 2010 (codified at 12 U.S.C. 5531 and 5536).
    \34\ Office of the Comptroller of the Currency, Comptroller's 
Handbook, ``Consumer Compliance, Unfair or Deceptive Acts or 
Practices and Unfair, Deceptive, or Abusive Acts or Practices'' 
(June 2020).
    \35\ Recent OCC enforcement actions can be found on the OCC's 
website at https://www.occ.gov/topics/laws-and-regulations/enforcement-actions/index-enforcement-actions.html.
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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.\36\ Further, under the Community Reinvestment Act (CRA) 
regulations, evidence of discriminatory or other illegal credit 
practices adversely affect a bank's CRA performance rating.\37\
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    \36\ See 15 U.S.C. 1691; 42 U.S.C. 3601 et seq. As noted above, 
supra note 28, other regulators may have oversight roles as well and 
can take appropriate enforcement action to address unlawful action 
within their jurisdiction.
    \37\ See 12 CFR 25.28(c); 12 CFR 25.17 (effective Oct. 1, 2020).
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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.'' \38\ 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.\39\ 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.'' \40\
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    \38\ OCC Advisory Letter 2003-2.
    \39\ See 12 CFR 7.4008(b), 34.3(b), part 30, appendix A, 
Sec. Sec.  II.C.2 and II.D.3.
    \40\ OCC Advisory Letter 2003-2.
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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).\41\ 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 their loan transaction, which helps to mitigate the 
risk that a transaction could be unfair or deceptive.
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    \41\ 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.
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    The OCC believes that the applicable statutes and regulations, 
enforceable guidelines, and other issuances include appropriate 
safeguards with respect to a bank's use of its lending power and are 
also appropriate to consider in the context of a lending partnership. 
While partnerships provide benefits, including expanding access to 
affordable credit, they may also pose legitimate safety and soundness 
concerns and raise questions regarding banks' involvement in activities 
that may not be consistent with applicable laws and regulations, if 
they are not appropriately managed. In this regard, the OCC believes it 
is appropriate to re-emphasize that ``any lending practices that take 
unfair advantage of borrowers, or that have a detrimental impact on 
communities . . . conflict with the high standards

[[Page 44227]]

expected of [banks].'' \42\ To ensure that banks operate consistent 
with these principles, the OCC evaluates the following as part of its 
routine supervision of a bank's lending relationships with third 
parties:
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    \42\ OCC Advisory Letter 2003-2.
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     Does the bank appropriately manage the risks associated 
with its third-party relationships, including through policies and 
procedures that ensure adherence to the bank's risk appetite and 
tolerances and by appropriate ongoing monitoring of the third party's 
relevant activities? \43\
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    \43\ See, e.g., OCC Bulletin 2013-29; OCC Bulletin 2020-10.
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     Are the underwriting criteria for loans made by the bank 
as part of third-party relationships consistent with criteria the bank 
would use for loans made without a third party? \44\
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    \44\ See, e.g., 12 CFR part 30, appendix A, Sec.  II; OCC 
Bulletin 2013-29; OCC Bulletin 2020-10.
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    [cir] If the underwriting criteria differs, are these underwriting 
criteria consistent with applicable law, including 12 CFR part 30, 
Appendix A, and with safety and soundness?
     Are the terms and structures of the bank's loan 
appropriate for the borrower? Are the lending practices appropriate? 
\45\
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    \45\ See, e.g., OCC Advisory Letter 2000-7; OCC Advisory Letter 
2000-10; OCC Advisory Letter 2003-2; OCC Advisory Letter 2003-3.
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    [cir] Are there characteristics, structures, or practices that make 
it difficult or impossible for a borrower to reduce or repay its 
indebtedness (e.g., repeated capitalization of interest; extended 
negative amortization; or a single payment or balloon payment)?
    [cir] Are borrowers forced into costly rollovers, renewals, or 
refinancing transactions that are likely to result in debt traps or 
ongoing cycles of debt?
     Are the bank's overall returns on the loans reasonably 
related to the bank's risks and costs of the loans (e.g., the total 
credit costs on short term loans, such as 12- to 36- month loans, are 
not substantial in relation to, or do not exceed, the principal amount 
of the loan)? \46\
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    \46\ See, e.g., Interagency Lending Principles for Offering 
Responsible Small-Dollar Loans (May 2020); OCC Advisory Letter 2000-
7.
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     Do disclosures provide sufficient information to draw the 
borrower's attention to key terms and to enable the borrower to 
determine whether the loan meets their particular financial 
circumstances and needs? For example, would a borrower who is not 
financially sophisticated or who is otherwise vulnerable to abusive 
practices understand the terms of the loan, including the loan's 
relative costs, risks, and benefits? \47\
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    \47\ See, e.g., OCC Advisory Letter 2003-2; OCC Advisory Letter 
2000-10.
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    In addition to the consequences described above, the proposal would 
operate together with the OCC's recently finalized Madden-fix rule to 
provide greater clarity to banks regarding their lending 
activities.\48\ 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, pursuant to 12 U.S.C. 85 and 1463(g), and (2) 
permits the loan to be subsequently sold, assigned, or otherwise 
transferred without affecting the interest term, pursuant to the 
Madden-fix rule. This clarity would enable banks to more effectively 
and efficiently work with other market participants to manage their 
risks and leverage their balance sheets to meet customers' needs for 
affordable credit.
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    \48\ See supra note 17.
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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 notice of proposed rulemaking and determined that it would 
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 proposed 
rule, to prepare an Initial 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 of less) or 
to certify that the proposed 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 proposal could affect how banks structure their current 
or future third-party relationships, the OCC does not expect that these 
adjustments would involve an extraordinary demand on a bank's human 
resources. Banks already have systems, policies, and procedures in 
place for issuing loans when third parties are involved, and it takes 
significantly less time to amend existing policies than to create them. 
In addition, any costs would likely be absorbed as ongoing 
administrative expenses. Based on this, the OCC believes the costs 
associated with any administrative changes in bank lending policies and 
procedures would be de minimis. Furthermore, legal certainty about 
whether a loan is made by a bank may encourage some banks to engage in 
new lending relationships or to expand their existing lending 
relationships. However, as noted, we do not expect the accompanying 
costs to be substantial. Therefore, the OCC anticipates that costs, if 
any, will be de minimis and certifies that this rule, if adopted, would 
not have a significant economic impact on a substantial number of small 
entities. Accordingly, a 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 the 
proposed 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 proposed rule does not 
impose new mandates. Therefore, the OCC concludes that implementation 
of the proposed 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

[[Page 44228]]

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. 
Although the proposed rule does not impose additional reporting, 
disclosures, or other new requirements on insured depository 
institutions, the OCC invites comments that will inform its 
consideration of the administrative burdens and the benefits of its 
proposal, as well as the effective date of the final rule.

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 proposes to amend 
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.

    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 national bank or Federal 
savings association makes a loan when the national bank or Federal 
savings association, as of the date of origination:
    (a) Is named as the lender in the loan agreement; or
    (b) Funds the loan.

Brian P. Brooks,
Acting Comptroller of the Currency.
[FR Doc. 2020-15997 Filed 7-21-20; 8:45 am]
BILLING CODE 4810-33-P