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On January 13, the OCC announced it has conditionally approved a South Dakota non-depository public trust company’s application to convert to a national trust bank. The digital bank—which offers digital asset and cryptocurrency custody services in certain states—has entered into an operating agreement as an enforceable condition of approval, which specifies capital and liquidity requirements and risk management expectations. By receiving a national trust bank charter, the digital bank will be allowed to expand its digital asset custody services nationally and may perform the functions and “activities of a fiduciary, agency, or custodial nature, in the manner authorized by federal and state law” with oversight being conducted by the OCC. According to the OCC, this approval “demonstrates that the national bank charters provided under the National Bank Act are broad and flexible enough to accommodate evolving approaches to financial services in the 21st century.”
On December 22, the Conference of State Bank Supervisors (CSBS) filed a complaint in the U.S. District Court for the District of Columbia opposing the OCC’s impending approval of a national bank charter for a financial services provider (company), arguing that the OCC is exceeding its chartering authority. According to the complaint, the company’s charter is close to being formally approved by the OCC after being “solicited, vetted and in November 2020 accepted as complete” by the agency. The complaint asserts the company will continue its lending and payment activities (which are currently state-regulated) without obtaining deposit insurance from the FDIC. The complaint alleges that the company is applying for the OCC’s nonbank charter, which was invalidated by the U.S. District Court for the Southern District of New York in October 2019 (which concluded that the OCC’s Special Purpose National Bank Charter (SPNB) should be “set aside with respect to all fintech applicants seeking a national bank charter that do not accept deposits,” covered by InfoBytes here). CSBS argues that “by accepting and imminently approving” the company’s application, the “OCC has gone far beyond the limited chartering authority granted to it by Congress under the National Bank Act (the “NBA”) and other federal banking laws,” as the company is not engaged in the “business of banking.” CSBS seeks to, among other things, have the court declare the agency’s nonbank charter program unlawful and prohibit the approval of the company’s charter under the NBA without obtaining FDIC insurance.
On September 29, the U.S. District Court for the Eastern District of New York granted a national bank’s request for interlocutory appeal of the court’s September 2019 decision denying the dismissal of a pair of actions, which alleged that the bank violated New York law by not paying interest on escrow amounts for residential mortgages. As previously covered by InfoBytes, last September, the district court concluded that the National Bank Act (NBA) does not preempt a New York law requiring interest on mortgage escrow accounts, because there is “clear evidence that Congress intended mortgage escrow accounts, even those administered by national banks, to be subject to some measure of consumer protection regulation.” The bank moved to amend the prior order and certify the preemption question for interlocutory appeal to the U.S. Court of Appeals for the Second Circuit. The court granted the motion stating that the case “presents one of the rare instances in which there would be system-wide benefits to granting an interlocutory appeal.” The court noted that certifying the question for appeal would foster an “effective and efficient judiciary” by saving the defendants and jurists “considerable time and effort” by not having to re-litigate the issue. Moreover, certifying for appeal would “materially advance the ultimate disposition of [the] litigation.”
On September 28, the U.S. District Court for the Eastern District of New York dismissed a putative class action alleging a national bank’s subsidiaries and trustee (collectively, “defendants”) violated New York usury and banking laws by charging and receiving payments at interest rates above the state’s 16 percent limits. The defendants moved to dismiss the action, arguing that the claims are preempted by the National Bank Act (NBA) because the national bank parent company, which is located in a state that does not impose interest rate limits so long as the rate is disclosed to the borrower, owned the credit card accounts underlying the securitization, and would therefore not be subject to New York’s limitations. The court agreed with the defendants, concluding that the U.S. Court of Appeals for the Second Circuit’s decision in Madden v. Midland Funding LLC (covered by a Buckley Special Alert) supported the premise that the NBA preempts the usury claims. Specifically, the court noted that the case is distinguishable from Madden in that the national bank retained ownership of the credit card accounts throughout securitization and thus, “maintains a continuous relationship with the customer accounts that goes beyond its designation as originator of those accounts.” The court also rejected the plaintiffs’ unjust enrichment claim, because it was duplicative of the usury claim and therefore was also preempted. Thus, the court dismissed the action in its entirety with prejudice, noting that “any pleading amendment would be futile.”
On September 21, the U.S. District Court for the Western District of New York dismissed allegations against two entities affiliated with a national bank, and a trust acting as trustee of one of the entities, ruling that a plaintiff’s “state-law usury claims are expressly preempted by the [National Banking Act].” The court noted that, “[e]ven before the OCC issued its rule clarifying that interest permissible before a transfer remains permissible after the transfer, [the plaintiff’s] claims would have been preempted” because the national bank “continues to possess an ‘interest in the account.’” The plaintiff contended he was charged usurious interest rates that exceeded New York’s interest rate cap on unsecured credit card loans originated by the national bank. According to the opinion, one of the entities contracted with the bank to service the credit card loans, with the bank retaining ownership of the accounts. The plaintiff argued that the U.S. Court of Appeals for the Second Circuit’s decision in Madden v. Midland Funding LLC (covered by a Buckley Special Alert) supported his claims against the affiliated entities, but the court disagreed, ruling that the national bank retained interest in the loans, which included the right to “change various terms and conditions” as well as interest rates.
On August 13, the OCC filed its reply brief in its appeal of a district court’s 2019 final judgment, which set aside the OCC’s regulation that would allow non-depository fintech companies to apply for Special Purpose National Bank charters (SPNB charter). As previously covered by InfoBytes, last October, the U.S. District Court for the Southern District of New York entered final judgment in favor of NYDFS, ruling that the SPNB regulation should be “set aside with respect to all fintech applicants seeking a national bank charter that do not accept deposits,” rather than only those that have a nexus to New York State.
As discussed in its opening brief filed in April appealing the final judgment (covered by InfoBytes here), the OCC reiterated that the case is not justiciable until it actually grants a fintech charter, that it is entitled to deference for its interpretation of the term “business of banking,” and that the court should set aside the regulation only with respect to non-depository fintech applicants with a nexus to New York. Following NYDFS’s opening brief filed last month (covered by InfoBytes here), the OCC argued, among other things, that the case is not ripe and NYDFS lacks standing because its alleged injuries are speculative and “rely on a series of events that have not occurred: OCC receiving and approving an SPNB charter application from a non-depository fintech that intends to conduct business in New York, and then does so in a manner that causes the harms [NYDFS] identifies.”
The OCC further argued that NYDFS “cannot show the statutory term ‘business of banking’ is unambiguous, or that it requires a bank to accept deposits to receive an OCC charter.” Highlighting the evolution of the “business of banking” over the last 160 years, the OCC contended that the National Bank Act does not contain a requirement “that an applicant for a national bank charter accept deposits if it can present the OCC with a viable business model that does not require it,” and that its regulation interpreting the ambiguous phrase “business of banking” is reasonable as it is consistent with U.S. Supreme Court case law. Lastly, the OCC argued that NYDFS’s claim that it is entitled to nationwide relief afforded under the Administrative Procedure Act (APA) is inconsistent with another 2nd Circuit decision, “as well as principles of equity and the APA’s text and history.” The OCC stated that even if the appellate court were to conclude that NYDFS’s claims are justiciable, the regulations should be set aside only with respect to non-depository fintech applicants with a nexus to New York.
On August 3, the Conference of State Bank Supervisors (CSBS) issued its comment letter to the OCC’s Notice of Proposed Rulemaking (NPR) on national bank and savings association activities concerning “non-branch” offices. Specifically, CSBS wrote that the “non-branch” provisions in the NPR make “far-reaching” revisions without legal authority, undermine the dual banking system, conflict with National Bank Act (NBA) preemption limits, and would allow national banks to operate branches without complying with related Community Reinvestment Act (CRA) obligations. Additionally, CSBS contended that the OCC’s rulemaking process is “truncated and flawed,” and afforded a particularly brief period for public comments during the Covid-19 pandemic.
According to CSBS, the NPR, announced in June (covered by InfoBytes here), would “expand the scope of activities that may occur at non-branch offices purportedly without regard” to state restrictions. These activities include: (i) performing loan approval and origination functions at a single, publicly accessible office; (ii) disbursing loan proceeds through an operating subsidiary; and (iii) establishing drop boxes and other unstaffed facilities. CSBS also contended that the NPR’s non-branch provisions would undermine Congressional intent and give national banks competitive advantages over state-charted banks. CSBS further argued that the non-branch provisions conflict with Congress’ clear intention that “NBA preemption does not apply to agents, affiliates or subsidiaries of national banks.” Finally, CSBS highlighted a distinction between the proposed non-branches (but de facto branches) and actual branch offices, arguing that the NPR creates a legal loophole allowing non-branch national banks to avoid CRA obligations associated with licensed branches.
On July 9, the U.S. District Court for the District of Maryland denied a national bank’s request for interlocutory appeal of the court’s February decision denying the bank’s motion to dismiss an action, which alleged that the bank violated Maryland law by not paying interest on escrow sums for residential mortgages. As previously covered by InfoBytes, after the bank allegedly failed to pay interest on a consumer’s mortgage escrow account, the consumer filed suit against the bank alleging, among other things, a violation of Section 12-109 of the Maryland Consumer Protection Act (MCPA), which “requires lenders to pay interest on funds maintained in escrow on behalf of borrowers.” The court rejected the bank’s assertion that the state law is preempted by the National Bank Act (NBA) and by the OCC’s 2004 preemption regulations. The court concluded that under the Dodd-Frank Act, national banks are required to pay interest on escrow accounts when mandated by applicable state or federal law.
The bank subsequently moved for an interlocutory appeal. In denying the bank’s request, the court explained that there was not a difference of opinion among courts as to whether the NBA preempts Maryland’s interest on escrow law. Specifically, the court noted that its “conclusion aligns with the only other two courts that have examined [the] particular question,” citing to the U.S. Court of Appeals for the Ninth Circuit’s decision in Lusnak v Bank of America and the Eastern District of New York’s decision in Hymes v. Bank of America (covered by InfoBytes here and here, respectively). After finding there is no “difference of opinion as to any ‘controlling legal issue,’” the court concluded the motion failed to satisfy the requisite elements for an interlocutory appeal.
On June 24, the Director of Regulatory Policy & Policy Counsel at CSBS, Mike Townsley, wrote a blog post in response to the OCC’s Bulletin on Covid-19 preemption, arguing that the bulletin does not have the force and effect of law. As previously covered by InfoBytes, on June 17, the OCC issued a Bulletin stating that banks are governed primarily by federal standards and generally are not subject to state law limitations. The OCC acknowledged states’ efforts to respond to the economic disruptions as “well-intended,” but noted that the competing requirements could risk banks’ safety and soundness. The Bulletin also provided specific examples of the types of state laws that do not apply to banks’ lending and deposit activities.
In response, Townsley asserts that the Bulletin has no preemptive effect, because the OCC did not follow the “process required by the National Bank Act (NBA) to determine that these state COVID-19 relief measures are preempted.” Specifically, Townsley argues that through the enactment of the Dodd-Frank Act, Congress “amended the NBA to overturn the OCC’s preemption regulations and establish substantive procedural requirements for the determination of whether the NBA preempts a state law.” The requirements include a court or the OCC having to conclude that the law “‘prevents or significantly interferes with the exercise by the national bank of its powers,’” which determination, according to Townsley, if made by the OCC, must be on a case-by-case basis, and include a notice and comment period and the backing of “‘substantial evidence’ on the record.” Townsley also seeks to cast further doubt as to whether the preemption regulations cited by the Bulletin can serve as a guide on procedural grounds, observing that Dodd-Frank requires the OCC to review and decide, through notice and comment, whether to “continue or rescind” each preemption determination every five years, and it has been “well over five years” since the rules were adopted and no such review has ever been conducted. Townsley concludes by citing to the 19th century Supreme Court decision Nat'l Bank v. Commonwealth, stating that national banks “’are subject to the laws of the State.’”
California State Assembly Banking and Finance Committee issues memorandum on Covid-19 banking and finance issues
On March 20, the California State Assembly Banking and Finance Committee issued a memorandum noting that state authority over large national banks “is significantly constrained by federal law.” The memorandum provides that, under the National Bank Act and related case law, courts have widely upheld federal preemption over state laws that “interfere with the business of banking.” As such, courts “would likely stop any attempts by the state to force banks to limit rates or fees, demand forbearance or loan modifications, or require banks to make certain loans.” While state officials may urge national banks to give their borrowers relief, “these requests do not carry the force of law.” The memorandum also discusses mortgage rates and home sales, noting that in the event that mortgage rates increase and negatively affect the real estate market, “state legislators have limited tools to address such problems.”
- Steven R. vonBerg to discuss "Non-QM market overview and the impact & key details of the sunrise of seasoned non-QM/extension of the patch" at the IMN Non-QM Virtual Conference
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- Jeffrey P. Naimon to discuss "What have you bought non-QM post-Covid?" at the IMN Non-QM Virtual Conference
- Garylene D. Javier to moderate "Innovation in an evolving privacy landscape" at the American Bar Association Business Law Section Consumer Financial Services Committee Winter Meeting