On February 8, 2022, a federal district court in California issued two opinions, granting summary judgment to the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) and dismissing challenges from eight states (plaintiffs ) that the agencies’ “good when made” rules facilitated predatory lending and were invalid under the Administrative Procedures Act.1 The rules essentially codified the doctrine that if an interest rate was legal when the loan was made by a bank, that rate remains legal after the sale, assignment or other transfer of the loan.2
The OCC and FDIC released their rules in response to the holding of the second circuit in Madden Funding v. MidlandLCC,3 where a national bank sold credit card debt to a buyer of non-bank debt. A debtor filed a putative class action lawsuit against the buyer’s affiliate for collecting on the account, including interest at a rate that exceeded New York’s usury law. The debtor argued that once the debt was sold by the bank, the preemption of interest rates under federal banking laws no longer applied and state law was governed.4 the crazy the court rejected the debt collector’s pre-emption defense, holding that where the operations of a national bank would not be significantly impaired, such as where the bank no longer has any interest in or control over the debt, the third party to whom the loan was assigned could not invoke usury preemption under federal banking law.
the crazy The decision created substantial uncertainty for both banks selling loans and non-banks buying loans as to whether the interest rate would continue to be legal after the sale. The OCC and FDIC “good when made” rules were intended to ensure that the initial interest rate would remain legal after the sale, regardless of state usury laws.
However, the plaintiffs alleged the rules allowed non-bank lenders to evade state-imposed interest rate caps to curb predatory consumer lending. The plaintiffs claimed that the non-bank lenders formed fictitious “rent-a-bank” partnerships with banks in which the bank originates the loan and then transfers it to the non-bank lender so that the interest rate cap of the relevant State is not applied. The plaintiffs challenged the rules of the Administrative Procedures Act.
The district court applied Chevron deference to the agencies’ interpretations of federal banking laws and upheld the rules.5 He determined that the OCC and FDIC acted within their authority and in accordance with previous congressional directives when enacting their rules. The court further found that the OCC and FDIC had reasonably interpreted the statutes and related rulemaking, and that their rulemaking was not “arbitrary” or “capricious,” since the record did not indicate not that the agencies had not taken into account the potential problems that could arise from the rules.
In response to the court’s decision, Acting Comptroller Hsu said, “This legal certainty should be used for the benefit of consumers and should not be abused. I want to reiterate that predatory lending has no place in the federal banking system. The OCC is committed to strong supervision that expands financial inclusion and ensures that banks are not used as a vehicle for “charter lease” arrangements.
Such arrangements are of concern to House Financial Services Committee Chair Maxine Waters (D-California), who has identified “combating bank leasing schemes that harm consumers” as a priority for the committee.6 Currently, however, no legislation is being introduced in Congress to address the Madden vs. Midland decision or rules of the OCC or FDIC.
It is important to note that the decision of the district court is subject to appeal. Further, the decision does not address the potential challenges of partnership banking models under a so-called “true lender” theory. According to this theory, some plaintiffs and states have sought, with mixed success, to assert that the relationship between a bank and a non-bank platform (often a fintech) is one in which the non-bank is the “true lender”. in the transaction. , and therefore the federal interest rate and license preemption do not apply. But, despite these limitations, the ruling is an important step in bringing more certainty to the financial services industry regarding business models involving loans acquired from banks.
1 Persons of the State of California, et al., v. Federal Deposit Insurance Corp..¸ No. 20-cv-05860-JSW (ND Cal. February 8, 2022); People of the State of California, et al., c. The Office of the Comptroller of the Currency, et al.., no. 20-cv-05200-JSW (ND Cal. February 8, 2022). The FDIC lawsuit was filed by California, the District of Columbia, Illinois, Massachusetts, Minnesota, New Jersey, New York and North Carolina. The lawsuit against the OCC was filed by California, Illinois and New York.
2 The OCC rule is “Interest allowed on loans sold, assigned or otherwise transferred», 85 Fed. Reg. 33,530 (June 2, 2020). The FDIC rule is “Rule of the Federal Interest Rates Authority», 85 Fed. Reg. 44146 (July 22, 2020).
3,786 F.3d 246 (2nd Cir. 2015).
4 Under the National Bank Act of 1864 and the Homeowners Loans Act of 1933, national banks are not subject to the interest rate ceilings of other states and can “export” the interest rates from their home state to the states where their borrowers live, and states’ usury of law claims against domestic banks are anticipated.
5 The “Chevron analysis” refers to a legal test established by the Supreme Court in Chevron USA v. Natural Resources Defense Council to determine when the court should defer to an agency’s interpretation of a statute. 467 US 837 (1984).
6 In a previous Congress, President Waters opposed legislation to codify the doctrine of validity from the time of its creation. At the time, she said, “We can’t introduce a bill that will allow non-banks like payday lenders to bypass state interest rate caps and make loans at high rate. Although Congress preempted some state laws for national banks, it did not allow national banks to extend the privilege to entities of their choosing.