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Agencies defeat states’ valid-when-made challenge
On February 8, the U.S. District Court for the Northern District of California granted cross-motions for summary judgment in favor of the OCC and FDIC (see here and here), upholding their respective rules which clarify that interest charges that are permissible when a loan is originated “shall not be affected by the sale, assignment, or other transfer of the loan.” The judgments resolve lawsuits brought by several state attorneys general in 2020, challenging both the OCC’s final rule on “Permissible Interest on Loans that are Sold, Assigned, or Otherwise Transferred” (known also as the valid-when-made rule) and the FDIC’s final rule which clarified that under the Federal Deposit Insurance Act (FDIA), whether interest on a loan is permissible is determined at the time the loan is made and is not affected by the sale, assignment, or other transfer of the loan.
In the OCC matter, the states’ argued that the agency’s valid-when-made rule (which effectively reversed the U.S. Court of Appeals for the Second Circuit’s 2015 Madden v. Midland Funding decision, and was covered by InfoBytes here) impermissibly preempts state law, is contrary to the plain language of section 85 (and section 1463(g)(1)), and contravenes the judgment of Congress, which declined to extend preemption to nonbanks. Moreover, the states contended that the OCC failed to give meaningful consideration to the commentary received regarding the rule, essentially enabling “‘rent-a-bank’ schemes.” The OCC countered that its rule does not preempt state law but rather “merely interprets” banks’ authority to charge interest. (Covered by InfoBytes here.) The court agreed with the OCC, holding that the OCC was interpreting the scope of 12 U.S.C. § 85, not determining whether to preempt state laws, and therefore was not required to follow the procedures set forth in 12 U.S.C. § 25b as the states alleged, including consulting with the CFPB. Applying the Chevron framework, the court upheld the OCC’s interpretations of the National Bank Act and Home Owners’ Loan Act. Acting Comptroller of the Currency Michael J. Hsu issued a statement following the decision, in which he emphasized that while the court’s order “affirmed the validity of the OCC’s rule,” the “legal certainty should be used to the benefit of consumers and not be abused.” He added that the agency “is committed to strong supervision that expands financial inclusion and ensures banks are not used as a vehicle for ‘rent-a-charter’ arrangements.”
In the FDIC matter, the states argued, among other things, that the FDIC did not have the power to issue the final rule under 12 U.S.C. § 1831d, and asserted that while the FDIC may issue “regulations to carry out” the provisions of the FDIA, it cannot issue regulations that would apply to nonbanks. The states also claimed that the rule’s extension of state law preemption would facilitate evasion of state law by enabling “rent-a-bank” schemes. The FDIC countered that the states’ arguments misconstrue the rule, which does not regulate nonbanks, does not interpret state law, and does not preempt state law. Rather, the FDIC argued that the rule clarifies the FDIA by “reasonably” filling in “two statutory gaps” surrounding banks’ interest rate authority. (Covered by InfoBytes here.) The court rejected the states’ argument that the FDIC exceeded its authority, and held that under Chevron, the agency’s interpretation of 12 U.S.C. § 1831d is not unreasonable. In upholding the FDIC’s interpretation, the court stated that the final rule “does not purport to regulate either the transferee’s conduct or any changes to the interest rate once a transaction is consummated.”
Fed updates legal interpretations related to several regulations
On December 30, the Federal Reserve Board added several new frequently asked questions related to legal interpretations of the Board’s regulations, including Regulations H, O, W, and Y, as well as questions concerning covered savings associations. The Fed noted that, unless specified, the FAQs are staff interpretations and have not been approved by the Board. Future revisions or supplements may be released as necessary or appropriate.
- Regulation H: Five new FAQs discuss (i) branch closing procedures and required notices; (ii) the ability to conduct branch activities should a bank relocate its main office; (iii) when a bank may acquire a debt obligation under its general powers to lend under state law; and (iv) public welfare investments made by state member banks involving housing projects with multiple residential buildings.
- Regulation O: A revised FAQ states that banks may not offer discounts on loan origination fees to an insider if the discount is not available to members of the public with one exception: a bank is not prohibited from “extending credit to an insider as part of a benefit or compensation program that (i) is widely available to employees of the member bank and (ii) does not give preference to any insider of the member bank over other employees of the member bank.”
- Regulation W: Thirty-four new FAQs address various topics related to (i) provisions concerning nonaffiliate and affiliate lending and extensions of credit under the attribution rule; (ii) valuation and timing principles; (iii) revolving credit facilities and loan commitments involving nonaffiliates; (iv) asset purchases from affiliates; (v) a bank’s acquisition of another company’s shares and liabilities; and (vi) exemptions.
- Regulation Y: Nine new FAQs discuss (i) circumstances under the Bank Holding Company Act (BHC Act) where “a bank or company that holds bank shares in a fiduciary capacity [would] be considered to have sole discretionary authority to exercise voting rights”; (ii) tying restriction qualifications, exceptions, and safe harbor; (iii) factors considered in the acquisition of bank securities or assets; (iv) trustee powers; (v) filing requirements for persons acquiring ownership or control of shares; (vi) appraisal standards for federally-related transactions; and (vii) rules for engaging in an activity that is complementary to a financial activity. The Fed notes that while these FAQs refer at times to bank holding companies, the FAQs are also applicable to foreign banking organizations that are subject to the BHC Act in the same manner as a bank holding company under the International Banking Act of 1978.
- Covered Savings Associations: Twenty-nine new FAQs address topics related to covered savings associations (CSAs) and companies that control a CSA pursuant to Section 5A of the Home Owners’ Loan Act. Among other things, the FAQs address (i) the scope of Section 5A; (ii) a CSA’s membership in the Federal Reserve System; (iii) filing requirements; (iv) requirements applicable to a CSA or a company controlling a CSA, as well as mutual CSAs and mutual holding companies controlling a CSA; (v) transactions involving a CSA or a company controlling a CSA; and (vi) the termination of an election to operate as a CSA.
Fed FAQs clarify bank control structure under BHC and HOLA
On September 30, the Federal Reserve Board issued several frequently asked questions related to its control and divestiture proceedings final control rule that took effect the same day. As previously covered by InfoBytes, in January the Fed revised the bank control framework to clarify the rules used to determine whether a company controls a bank or a bank controls a company pursuant to the Bank Holding Company Act (BHC Act) and the Home Owners' Loan Act (HOLA). Among other things, the Fed notes that it “does not expect” to revisit investment structures that had previously been reviewed prior to the effective date of the control rule, and would not require changes to investment structures “that represent a reasonable interpretation of [Fed] precedent at the time the structure was created.” The FAQs also discuss what constitutes a “limiting contractual right” with respect to a contractual provision between “a first company and a second company that requires the second company to conform its activities to the activities restrictions under the [BHC Act] or [HOLA],” along with whether the control rule differentiates “between limiting contractual rights based on the circumstances under which the right was created or the nature of the document in which the right resides.”
Fed delays revised control framework until September
On March 31, the Federal Reserve Board (Fed) announced that its control and divestiture proceedings final rule—set to take effect April 1—would be delayed for six months. As previously covered by InfoBytes, the Fed revised the bank control framework to clarify the rules used to determine if a firm controls a bank pursuant to the Bank Holding Company Act and the Home Owner’s Loan Act. The Fed stated that “[t]he delay will reduce operational burden and allow institutions to focus on current economic conditions” created by the Covid-19 pandemic. No changes were made to the final rule, which will now become effective on September 30.
Fed clarifies bank control structure under BHC and HOLA
On January 30, the Federal Reserve Board (Fed) issued a final rule to simplify and increase the transparency of existing rules for determining if a company has control over a banking organization under the Bank Holding Company Act (BHC Act) and the Home Owners’ Loan Act (HOLA). According to the Fed, the final rule—proposed last April (covered by InfoBytes here)—establishes “a comprehensive and public framework to determine when a company controls a bank or a bank controls a company” through the use of several key factors including “the company’s total voting and non-voting equity investment in the bank; director, officer, and employee overlaps between the company and the bank; and the scope of business relationships between the company and the bank.” A tiered presumptions visual accompanied the final rule, which outlines the determination of control based on the level of voting ownership at four different thresholds: less than 5 percent; 5 to 9.99 percent; 10 to 14.99 percent; and 15 to 24.99 percent. In addition, the Fed noted that the final rule “generally applies the same standards in the context of the BHC Act and HOLA” in terms of the definition of “control.” Federal Reserve Governor Lael Brainard issued a statement supporting the final rule, but stressed the importance of monitoring banking organizations’ ownership structures in light of the “control framework” and industry trends in order to identify issues affecting financial stability and competition. Brainard further emphasized that the “control framework” should be monitored in terms of how it interacts with other regulations involving ownership thresholds. The final rule takes effect April 1.
OCC releases guidance documents for final rule implementing HOLA amendments
On July 1, the OCC issued Bulletin 2019-31, which describes the process for federal savings associations to make an election to operate as “covered savings associations,” with the rights and privileges of national banks under the May 24 Home Owners’ Loan Act (HOLA) final rule. As previously covered by InfoBytes, the OCC issued a final rule—pursuant to section 206 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, amending the Home Owners’ Loan Act (HOLA)—which establishes standards permitting federal savings associations with total consolidated assets of $20 billion or less as of December 31, 2017, to elect to operate as “covered savings associations,” with the rights and privileges of national banks. The final rule provides that associations who choose this election will retain their federal savings association charters and existing governance frameworks, and will generally be subject to the same duties, restrictions, penalties, liabilities, conditions, and limitations that apply to national banks.
Bulletin 2019-31 reminds entities of the July 1 effective date of the final rule and provides details on the process for making an election pursuant to the rule. Additionally, along with the Bulletin, the OCC released a set of Frequently Asked Questions covering the final rule.
OCC issues final rule allowing certain federal savings associations to operate with national bank powers
On May 24, the OCC issued a final rule, which establishes standards permitting federal savings associations with total consolidated assets of $20 billion or less as of December 31, 2017, to elect to operate as “covered savings associations,” with the rights and privileges of national banks. The final rule—issued pursuant to section 206 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, which amended the Home Owners’ Loan Act (HOLA)—provides that associations who choose this election will retain their federal savings association charters and existing governance frameworks, and will generally be subject to the same duties, restrictions, penalties, liabilities, conditions, and limitations that apply to national banks. Among other things, the final rule also states that “a covered savings association may continue to operate as a covered savings association if, after the effective date of the election, it has total consolidated assets greater than $20 billion.” The final rule takes effect July 1.
Federal Reserve proposes new structure for determining bank control
On April 23, the Federal Reserve Board issued a notice of proposed rulemaking (NPRM) and request for comment to simplify and increase transparency of existing rules for determining if a company has control over a banking organization under the Bank Holding Company Act and the Home Owners’ Loan Act. Among other things, the NPRM will “provide a series of presumptions of control for use by the Board in control proceedings and other control determinations,” and will create a tiered structure premised on the level of voting ownership—5 percent, 10 percent, and 15 percent—of one company in another company. The Board noted it will also consider several additional factors, such as (i) the size of a company’s voting and total equity investment; (ii) rights to director and committee representation; (iii) use of proxy solicitations; (iv) individuals serving as management, employees, and directors at both companies; (v) agreements permitting influence or restrictions on management or operational decisions; and (vi) the scope of business relationships between the companies. The NPRM also contains a new proposed presumption of “noncontrol,” which will apply in instances where a company owns less than 10 percent of the voting securities of a second company and does not trigger any of the presumptions of control. According to a statement issued by Vice Chairman for Supervision Randal Quarles, the NPRM is designed to address concerns that “it has been difficult for banking firms and investors in banking firms to determine whether a particular proposed investment could give rise to control.” Comments on the NPRM are due 60 days after publication in the Federal Register.