Modernizing Credit Opportunities Act

Insured depository institutions have found efficiencies in their lending operations through a variety of different relationships with nondepository institutions that perform different lending-related functions.

The Federal banking regulators have recognized that insured depository institutions may enter into relationships with third parties to originate loans, have recognized the benefits of these arrangements for institutions and borrowers alike, and have issued guidance to ensure the safety and soundness of such relationships and to protect borrowers.

Insured depository institutions routinely engage in third-party lending arrangements and regulators have long recognized that third-party lending arrangements provide institutions with the ability to supplement, enhance or expedite lending services for their customers, and that engaging in third-party lending arrangements also enables institutions to reduce the cost of delivering credit products, to expand access to credit, and to achieve strategic goals.

Litigation concerning loans made by an insured depository institution that involve arrangements with third parties that perform lending-related functions have required the courts to determine the identity and location of the lender but have reached inconsistent results.

Inconsistencies in the determinations of the identity and location of the lender under judicially crafted multi-factor balancing tests lessen the efficiency of the lending process, reduce the transparency of the lending process for both lenders and borrowers, and jeopardize the substantial benefits of third-party lending arrangements for borrowers and the economy.

In order to maximize efficiency and transparency, it is necessary to clarify and reinforce existing law by codifying clear and straightforward standards that establish that an insured depository institution is the lender on any loan or discount made, or upon any note, bill of exchange or other evidence of debt where it is the party to which the debt is initially owed according to its terms and that any relationship with a third party that performs lending-related functions does not affect the determination of such institution’s role as the lender or its location.

Amendment to the Bank Service Company Act— Section 7 of the Bank Service Company Act (12 U.S.C. 1867) is amended—

Amendment to the Home Owners’ Loan Act— Section 5(d)(7) of the Home Owners’ Loan Act (12 U.S.C. 1464(d)(7)) is amended—

Amendment to the Revised Statutes— Section 5197 of the Revised Statutes (12 U.S.C. 85) is amended by inserting the following after the first sentence: “A loan, discount, note, bill of exchange, or other debt is made by an association, and subject to the preceding sentence, where the association is the party to which the debt is owed according to the terms of the loan, discount, note, bill of exchange, or other debt, regardless of any later assignment. The existence of a service or economic relationship between an association and another person shall not affect the application of this section to the rate of interest upon the loan or discount made, or the note, bill, or other evidence of debt or the identity of the association as the lender under the agreement.”.

Amendment to the Federal Deposit Insurance Act— Subsection (a) of section 27 of the Federal Deposit Insurance Act (12 U.S.C. 1831d(a)) is amended by adding at the end the following: “A loan, discount, note, bill of exchange, or other debt is made by a State bank or an insured branch of a foreign bank, and subject to the preceding sentence, where a State bank or an insured branch of a foreign bank is the party to which the debt is owed according to the terms of the loan, discount, note, bill of exchange or other debt, regardless of any later assignment. The existence of a service or economic relationship between a State bank or insured branch of a foreign bank and another person shall not affect the application of this subsection to the interest rate upon the loan or discount made, or upon the note, bill of exchange, or other evidence of debt or the identity of the State bank or insured branch of a foreign bank as the lender under the agreement.”.

Amendment to the Home Owners’ Loan Act— Section 4(g)(1) of the Home Owners’ Loan Act (12 U.S.C. 1463(g)(1)) is amended by adding at the end the following: “An extension of credit is made by a savings association, and subject to the preceding sentence, where a savings association is the party to which the debt is owed according to the terms of the debt, regardless of any later assignment. The existence of a service or economic relationship between a savings association and another person shall not affect the application of this subsection to the interest rate upon the extension of credit or the identity of the savings association as the lender under the agreement.”.