InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
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.”
OCC cites preemption decision in valid-when-made rule challenge
On August 24, the OCC filed a statement of recent decision in support of its motion for summary judgment in an action brought against the agency by several state attorneys general challenging 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). The final rule was designed to effectively reverse the U.S. Court of Appeals for the Second Circuit’s 2015 Madden v. Midland Funding decision and provide that “[i]nterest on a loan that is permissible under [12 U.S.C. § 85 for national bank or 12 U.S.C. § 1463(g)(1) for federal thrifts] shall not be affected by the sale, assignment, or other transfer of the loan.” (Covered by a Buckley Special Alert.) The states’ challenge argued that the rule “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 non-banks. 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.” (Covered by InfoBytes here.) Both parties sought summary judgment, with the OCC arguing that the final rule validly interprets the National Bank Act (NBA) and that not only does the final rule reasonably interpret the “gap” in section 85, it is consistent with section 85’s “purpose of facilitating national banks’ ability to operate their nationwide lending programs.” Moreover, the OCC asserted that 12 U.S.C. § 25b’s preemption standards do not apply to the final rule, because, among other things, the OCC “has not concluded that a state consumer financial law is being preempted.” (Covered by InfoBytes here.)
In its August 24 filing, the OCC brought to the court’s attention a recent order issued by the U.S. District Court for the Western District of Wisconsin. As previously covered by InfoBytes, the Wisconsin court reviewed claims under the FDCPA and the Wisconsin Consumer Act (WCA) against a debt-purchasing company and a law firm hired by the company to recover outstanding debt and purported late fees on the plaintiff’s account in a separate state-court action. Among other things, the court examined whether the state law’s notice and right-to-cure provisions were federally preempted by the NBA, as the original creditor’s rights and duties were assigned to the debt-purchasing company when the account was sold. The court ultimately concluded that the WCA provisions “are inapplicable to national banks by reason of federal preemption,” and, as such, the court found “that a debt collector assigned a debt from a national bank is likewise exempt from those requirements” and was not required to send the plaintiff a right-to-cure letter “as a precondition to accelerating his debt or filing suit against him.”
FDIC argues “valid-when-made rule” fills statutory gaps
On July 15, the FDIC filed a reply in support of its motion for summary judgment in a lawsuit challenging the agency’s “valid-when-made rule.” As previously covered by InfoBytes, last August state attorneys general from California, Illinois, Massachusetts, Minnesota, New Jersey, New York, North Carolina, and the District of Columbia filed a lawsuit in the U.S. District Court for the Northern District of California arguing, among other things, that the FDIC does not have the power to issue the rule, and asserting that the FDIC has the power to issue “‘regulations to carry out’ the provisions of the [Federal Deposit Insurance Act],” but not regulations that would apply to non-banks. The AGs also claimed that the rule’s extension of state law preemption would “facilitate evasion of state law by enabling ‘rent-a-bank’ schemes,” and that the FDIC failed to explain its consideration of evidence contrary to its assertions, including evidence demonstrating that “consumers and small businesses are harmed by high interest-rate loans.” The complaint asked the court to declare that the FDIC violated the Administrative Procedures Act (APA) in issuing the rule and to hold the rule unlawful. The FDIC countered that the AGs’ arguments “misconstrue” the rule because it “does not regulate non-banks, does not interpret state law, and does not preempt state law,” but rather clarifies the FDIA by “reasonably” filling in “two statutory gaps” surrounding banks’ interest rate authority (covered by InfoBytes here).
The AGs disagreed, arguing, among other things, that the rule violates the APA because the FDIC’s interpretation in its “Non-Bank Interest Provision” (Provision) conflicts with the unambiguous plain-language statutory text, which preempts state interest-rate caps for federally insured, state-chartered banks and insured branches of foreign banks (FDIC Banks) alone, and “impermissibly expands the scope of [12 U.S.C.] § 1831d to preempt state rate caps as to non-bank loan buyers of FDIC Bank loans.” (Covered by InfoBytes here.) In its reply in support of the summary judgment motion, the FDIC’s arguments included that the rule is a “reasonable interpretation of §1831d” in that it filled two statutory gaps by determining that “the interest-rate term of a loan is determined at the time when the loan is made, and is not affected by subsequent events, such as a change in the law or the loan’s transfer.” The FDIC further claimed that the rule should be upheld under Chevron’s two-step framework, and that §1831d was enacted “to level the playing field between state and national banks, and to ‘assure that borrowers could obtain credit in states with low usury limits.’” Additionally, the FDIC refuted the AGs’ argument that the rule allows “non-bank loan buyers to enjoy § 1831d preemption without facing liability for violating the statute,” pointing out that “if a rate violates § 1831d when the loan is originated by the bank, loan buyers cannot charge that rate under the Final Rule because the validity of the interest is determined ‘when the loan is made.’”
State AGs urge Congress to rescind OCC’s “true lender” rule
On April 21, a coalition of 26 state attorneys general sent a letter urging Congress to exercise its authority under the Congressional Review Act (CRA) and rescind the OCC’s “True Lender Rule” in order to “safeguard states’ fundamental sovereign rights to protect their citizens from financial abuse.” As previously covered by InfoBytes, the OCC’s final rule amended 12 CFR Part 7 to state that a bank makes a loan when, as of the date of origination, it either (i) is named as the lender in the loan agreement or (ii) funds the loan. The final rule also clarified that if “one bank is named as the lender in the loan agreement and another bank funds the loan, the bank that is named as the lender in the loan agreement makes the loan.” In their letter, the AGs expressed concern that the final rule “establishes a simplistic standard to redefine the meaning of ‘true lender,’” enabling predatory lenders to “circumvent” state interest-rate caps through “rent-a-bank” schemes, which would in turn allow banks to act as lenders in name only while passing state law exemptions for banks to non-bank entities. The letter references a complaint filed by eight state AGs against the OCC in January challenging the final rule (covered by InfoBytes here) and argues that in finalizing the rule the OCC “acted in a manner contrary to centuries of case law [and] the OCC’s own prior interpretation of the law,” and seeks to preempt state usury law and “infringe on the States’ historical police powers and facilitate predatory lending.”
In March, both House and Senate Democrats introduced CRA resolutions (see H.J. Res. 35 and S.J. Res. 15) intended to provide for congressional disapproval and invalidation of the OCC’s final rule. The OCC responded on April 14, arguing that “disapproval of the rule would return bank lending relationships to the previous state of legal and regulatory uncertainty, which. . . adversely affects the function of secondary markets and restricts the availability of credit.” The OCC further stated that the final rule is intended to enhance the agency’s ability to supervise bank lending and “does not change bank’s authority to export interest rates” nor does it “permit national banks to charge whatever rate they like” as both federal and state-chartered banks are required to conform to applicable interest rate limits. “Disparities of interest rates from state to state result from differences in the state laws that impose these caps, not OCC rules or actions,” the OCC stressed, adding that “[s]tates retain the authority to set interest rates.” However, the Conference of State Bank Supervisors sent a letter to Congress in support of S.J. Res. 15, disagreeing with the OCC and noting that the final rule, if it stands, would “eviscerate the power of state interest rate caps and rid state regulators of the most effective tool to protect consumers from such predatory lending.”
States seek to invalidate OCC true lender rule
On January 5, the New York attorney general, along with the attorneys general from six other states and the District of Columbia filed a complaint against the OCC in the U.S. District Court for the Southern District of New York challenging the OCC’s “true lender” final rule. As previously covered by InfoBytes, in October 2020, the OCC issued a final rule addressing when a national bank or federal savings association is the “true lender” in the context of a partnership between a bank and a third party to provide certainty about key aspects of the legal framework that applies. The final rule amends 12 CFR Part 7 to state that a bank makes a loan when it, as of the date of origination, (i) is named as the lender in the loan agreement, or (ii) funds the loan. The complaint argues, among other things, that the OCC exceeded its statutory authority, and “acted in a manner contrary to centuries of case law [and] the OCC’s own prior interpretation of the law.” The attorneys general reject the OCC’s contention that the final rule is intended to address “‘ambiguity’ in provisions of three federal banking statutes that generally authorize National Banks to make loans,” and instead argue that the rule seeks to preempt state usury law and “infringe on the States’ historical police powers and facilitate predatory lending.” The complaint seeks a declaratory judgment that the OCC violated the Administrative Procedures Act and requests the court set aside the final rule as unlawful.
OCC finalizes true lender rule
On October 27, the OCC issued a final rule (see also Bulletin 2020-92) addressing when a national bank or federal savings association (bank) is the “true lender” in the context of a partnership between a bank and a third party to provide certainty about key aspects of the legal framework that applies. The final rule generally adopts the test proposed by the agency in July (see InfoBytes coverage here). Specifically, the final rule amends 12 CFR Part 7 to state that a bank makes a loan when it, as of the date of origination, (i) is named as the lender in the loan agreement or (ii) funds the loan. Additionally, the final rule clarifies that if “one bank is named as the lender in the loan agreement and another bank funds the loan, the bank that is named as the lender in the loan agreement makes the loan.” Lastly, the OCC emphasizes that compliance obligations stay with the “true lender” of the loan and “if a bank fails to satisfy its compliance obligations, the OCC will not hesitate to use its enforcement authority consistent with its longstanding policy and practice.”
The rule is effective 60 days after publication in the Federal Register.
NYDFS opposes OCC’s true lender rule
On September 2, NYDFS Superintendent Linda A. Lacewell announced the regulator’s opposition to the OCC’s proposed “true lender” rule. As previously covered by InfoBytes, the proposed rule would amend 12 CFR part 7 to state that “a bank makes a loan when, as of the date of origination, it (i) is named as lender in the loan agreement or (ii) funds the loan,” and intends to cover situations where the bank “has a predominant economic interest in the loan,” as the original funder, even if it is not “the named lender in the loan agreement as of the date of origination.” In response, NYDFS issued a comment letter stating that if the proposed rule is enacted, nonbank lenders that are not chartered or licensed by the federal government would be able to “qualify for federal protection from state usury laws” and make high-cost loans with interest rates well above the interest rate normally permitted by New York law. These laws currently make predatory, high-interest lending illegal, and make usurious loans entered into in the state void and unenforceable, NYDFS stated, arguing that the proposed rule would “gut state usury laws and state licensing requirements with respect to unregulated lenders.” NYDFS also stated, among other things, that the proposed rule, if codified, would “effectively sanction so-called ‘rent-a-bank’ or ‘rent-a-charter’ schemes” and allow “unregulated nonbank lenders to launder loans through banks as an end-around consumer-protective state usury limits.” In addition, NYDFS argued that the OCC lacks the authority to issue the proposed rule “because it has failed to comply with the requirements applicable to preemption determinations under federal law and conflicts with Congress’ intent to limit the preemption of states’ consumer protection laws.”
OCC proposes True Lender rule
On July 20, the OCC issued a proposed rule (see also Bulletin 2020-70) that addresses when a national bank or federal savings association (bank) is the “true lender” in the context of a partnership between a bank and a third party in order to clarify uncertainties about the legal framework that applies. Specifically, the proposed rule amends 12 CFR part 7 to state that “a bank makes a loan when, as of the date of origination, it (i) is named as lender in the loan agreement or (ii) funds the loan.” The OCC notes that the proposal intends to cover situations where the bank “has a predominant economic interest in the loan,” as the original funder, even if it is not “the named lender in the loan agreement as of the date of origination.”
In response, the Conference of State Bank Supervisors (CSBS) issued a statement opposing the proposal, stating that “the true lender doctrine is and should remain a matter of state law.”
As previously covered by InfoBytes, the OCC and the FDIC recently issued final rules clarifying that whether interest on a loan is permissible under federal law is determined at the time the loan is made and is not affected by the sale, assignment, or other transfer of the loan, effectively reversing the U.S. Court of Appeals for the Second Circuit’s 2015 Madden v. Midland Funding decision. At the time, both agencies chose not to address the “true lender” issue.
Representatives hold hearing on “rent-a-bank” schemes
On February 5, the House Financial Services Committee held a hearing titled “Rent-A-Bank Schemes and New Debt Traps: Assessing Efforts to Evade State Consumer Protections and Interest Rate Caps” to discuss policies relating to state interest rate caps and permissible interest rates on small dollar loans such as payday and car-title loans. As previously covered by a Buckley Special Alert, in November, the OCC and the FDIC proposed rules meant to override the 2015 Madden v. Midland funding decision from the U.S. Court of Appeals for the Second Circuit, and reinforce that when a national bank or savings association, or state chartered bank, transfers a loan, the permissible interest rate after the transfer is the same as it was prior to the transfer. In January, however, a group of attorneys general from 21 states and the District of Columbia submitted a comment letter to the OCC claiming the proposed rule would encourage predatory lending through “rent-a-bank schemes.” (Covered by InfoBytes here.) During the hearing, Committee Chairwoman Maxine Waters (D-CA), expressed concern that the two agency proposals would harm consumers by allowing non-banks to partner with banks and enable non-bank lenders to “peddle harmful short-term, triple-digit interest rate loans.” Representative Rashida Tlaib (D-MI) echoed that concern when she suggested that “rent-a-bank” schemes allow non-banks to dodge state interest rate laws. Many Republicans had views differing from those expressed by Tlaib and Waters. North Carolina Representative Patrick McHenry remarked that the proposals from the OCC and the FDIC merely formalized the “valid when made” rule that had been in use for over a century. At the hearing, HR 5050, which would cap federal interest rates on certain small loans at 36 percent, was also discussed, with several Democrats stressing that the cap may negatively affect credit availability to some consumers.
Senate Democrats criticize OCC and FDIC fintech proposals
On November 21, six Democratic Senators wrote to OCC Comptroller Joseph Otting and FDIC Chairman Jelena Williams to strongly oppose recent proposed rules by the agencies (see OCC notice here and FDIC notice here). As previously covered by a Buckley Special Alert, the OCC and FDIC proposed rules reassert the “valid-when-made doctrine,” which states that loan interest that is permissible when the loan is made to a bank remains permissible after the loan is transferred to a nonbank. In the letter, the Senators suggest that the proposed rules enable non-bank lenders to avoid state interest rate limits. According to the letter, the proposed rules would encourage “payday and other non-bank lenders to launder their loans through banks so that they can charge whatever interest rate federally-regulated banks may charge.” Additionally, the letter urges both agencies to consider their past declarations against “rent-a-bank” schemes, and contends that the agencies should not attempt to address Madden v. Midland Funding, LLC, which rejected the valid-when-made doctrine, through rulemaking, but should instead leave such lawmaking to Congress.