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21 Attorneys General oppose “Madden fix” legislation
On June 27, the Colorado and New York Attorneys General led a coalition of 21 state Attorneys General in a letter to congressional leaders opposing HR 3299 (“Protecting Consumers’ Access to Credit Act of 2017”) and HR 4439 (“Modernizing Credit Opportunities Act”), which would effectively overturn the 2015 decision in Madden v. Midland Funding, LLC. Specifically, H.R. 3299 and H.R. 4439 would codify the “valid-when-made” doctrine and ensure that a bank loan that was valid as to its maximum rate of interest in accordance with federal law at the time the loan was made shall remain valid with respect to that rate, regardless of whether the bank subsequently sells or assigns the loan to a third party.
The letter argues that the legislation “would legitimize the efforts of some non-bank lenders to circumvent state usury law” and it was not Congress’ intention to authorize these arrangements with the creation of the National Bank Act. In support of their position, the Attorneys General cite to a 2002 press release by the OCC and the more recent OCC Bulletin 2018-14 on small dollar lending, which stated the agency “views unfavorably an entity that partners with a bank with the sole goal of evading a lower interest rate established under the law of the entity’s licensing state(s).” (Previously covered by InfoBytes here.) The letter also refers to an 1833 Supreme Court case, Nichols v. Fearson, which held that a “valid loan is not invalidated by a later usurious transaction involving that loan” but was not relevant to the decision in Madden because the borrower’s argument related to preemption. Ultimately, the Attorneys General conclude the legislation would erode an “important sphere of state regulation” as state usury laws have “long served an important consumer protection function in America.”
9th Circuit will not rehear interest on escrow preemption decision
On May 16, a panel of three judges on the U.S. Court of Appeals for the 9th Circuit denied the petition for an en banc rehearing of its March decision, which held that a California law that requires a bank to pay interest on escrow funds is not preempted by federal law. In addition to the national bank’s appeal for a rehearing, the OCC notably filed an amicus brief supporting the rehearing, arguing that the court “comprehensively misinterpreted” the Supreme Court’s 1996 decision Barnett Bank of Marion County v. Nelson. (Previously covered by InfoBytes here.) The panel noted that the full court had been advised of the bank’s petition for rehearing, and no judge had requested a vote on rehearing.
OCC files amicus brief in support of rehearing in 9th circuit preemption decision
On April 24, the OCC filed an amicus curiae brief in support of an en banc rehearing of the U.S. Court of Appeals for the 9th Circuit’s March decision, which held that a California law that requires the bank to pay interest on escrow funds is not preempted by federal law. As previously covered by InfoBytes, the 9th Circuit held that the Dodd-Frank Act of 2011 (Dodd-Frank) essentially codified the existing National Bank Act (NBA) preemption standard from the 1996 Supreme Court decision in Barnett Bank of Marion County v. Nelson.
In a strongly worded brief, the OCC states that the court “errs in matters of fundamental importance to the national banking system” and “comprehensively misinterpreted” Barnett Bank and the cases upon which that decision rests. The OCC specifically argues that the court misinterpreted the legal standard for preemption articulated by Barnett Bank, ignored applicable Supreme Court standards prescribing a test for reviewing preemptive regulations, improperly created a burden of proof on national banks to demonstrate Congressional intent as to preemption, and inappropriately imposed a higher bar for “large corporate banks” to show state law interference. The OCC also argues that the court’s reliance on the effective dates of the Dodd-Frank provisions relied upon by the Court pre-date the transactions that were at issue in the case, and would therefore have no application to the facts of the case.
This filing supports the national bank’s petition for en banc rehearing filed April 13 and previously covered by InfoBytes here.
Bank petitions for rehearing of 9th Circuit preemption decision; OCC to file amicus brief in support of bank
On April 13, a national bank filed a petition for an en banc rehearing of the U.S. Court of Appeals for the 9th Circuit’s March decision, which held that a California law that requires the bank to pay interest on escrow funds is not preempted by federal law. As previously covered by InfoBytes, the 9th Circuit held that the Dodd-Frank Act of 2011 (Dodd-Frank) essentially codified the existing National Bank Act (NBA) preemption standard from the 1996 Supreme Court decision in Barnett Bank of Marion County v. Nelson. The panel cited to Section 1639d(g)(3) of Dodd-Frank, which, according to the opinion, expresses Congress’ view that the type of law at issue does not “prevent or significantly interfere with a national bank’s operations” because the law does not “prevent or significantly interfere” with the national bank’s exercise of its power. Additionally, the 9th Circuit concluded that the OCC’s 2004 preemption regulation had no effect on the preemption standard.
In its petition for rehearing, the bank argues that the 9th Circuit’s decision, if allowed to stand, “will create confusion regarding which state laws apply to national banks and restrict the terms on which they may extend credit” because the decision conflicts with previous decisions by the same court, the Supreme Court, and other circuits. The bank also acknowledges the OCC’s intent to file an amicus curiae brief in support of the petition no later than April 23.
9th Circuit holds California's interest on escrow requirements is not preempted by federal law
On March 2, the U.S. Court of Appeals for the Ninth Circuit held that a national bank must comply with a California law that requires mortgage lenders to pay interest on the funds held in a consumer’s escrow account because the law does not “prevent or significantly interfere” with the national bank’s exercise of its power. The case results from a 2014 lawsuit in which a consumer sued the national bank for refusing to pay interest on the funds in his mortgage escrow account as required by a California state law. The district court dismissed the action, holding that the California state law interfered with the bank’s ability to perform its business making mortgage loans and therefore, was preempted by the National Bank Act (NBA).
In reversing the district court’s decision, the 9th Circuit held that the Dodd-Frank Act of 2011 (Dodd-Frank) essentially codified the existing NBA preemption standard from the 1996 Supreme Court decision in Barnett Bank of Marion County v. Nelson. The panel cited to Section 1639d(g)(3) of Dodd-Frank (“if prescribed by applicable State or Federal law, each creditor shall pay interest to the consumer on the amount held in any . . . escrow account that is subject to this section in the manner as prescribed by that applicable State or Federal law”), which, according to the opinion, expresses Congress’ view that the type of law at issue does not “prevent or significantly interfere with a national bank’s operations.” Moreover, the panel disagreed with the national bank’s reliance on the OCC’s 2004 preemption regulation, which interpreted the standard more broadly, by concluding that the regulation had no effect on the preemption standard. This decision could have significant implications for the rise of preemption by federally chartered banks.
Judge says overdraft fees are not usurious, removes claim from lawsuit
On February 28, the U.S. District Court for the District of South Carolina dismissed a complaint from a consolidated class action against a national bank, which alleged that the bank’s $20 overdraft fee is an interest charge on credit and therefore exceeds usury limits under the National Bank Act (NBA). The plaintiffs in the consolidated class action challenged the bank’s methods for assessing overdraft fees, posting debit transactions, and assessing “sustained” overdraft fees, claiming they violated federal law. In granting the dismissal, the court noted that it had previously rejected a materially identical usury claim in December 2015 and that no new evidence or authority had been brought to light that would change its decision. In addition, the court concluded that “the law is still clear that sustained overdraft fees are not interest, and that assessing such fees cannot violate the usury provision of the NBA.”
OCC Acting Comptroller Shares Thoughts on Agency’s Innovation Efforts
On September 25, OCC Acting Comptroller of the Currency Keith Noreika spoke before the 2017 Online Lending Policy Summit in Washington, D.C. to discuss ways the maturing banking industry can respond to changing market conditions through the adoption of new business models and adjustments to long-term strategies. “Some pundits see the growth of the online lending industry as a response to the nation’s banking industry. And some say that if the industry had been sufficiently agile and fully met the need for lending, alternative lenders would not have grown so rapidly,” Noreika stated. “I do not share that view. I see the growth of online lending and marketplace lenders as the natural evolution of banking itself.”
According to Noreika, about $40 billion in consumer and small business loans in the United States have been originated by marketplace lenders during the past decade, and since 2010, online lending has doubled each year. In fact, Noreika noted, “some analysts suggest that the market will reach nearly $300 billion by 2020, and others suggest as much as $1 trillion by 2025.” However, the online industry faces certain challenges and “adapting to new market conditions and effectively managing evolving risks” is pertinent to their success. Noreika highlighted recent innovation efforts by the OCC, such as the agency’s Office of Innovation’s “Office Hours,” which was created to facilitate discussions related to fintech and financial innovation. (See previous InfoBytes coverage here.) Another example is the OCC’s plan to develop “regulatory sandboxes” and bank pilot programs to “foster responsible innovation by OCC-supervised banks” as a means to expand the OCC’s own knowledge in this space. Importantly, Noreika addressed the OCC’s position concerning chartering of fintech companies that seek to expand into banking, along with the possibility of “offering special-purpose national bank charters to nondepository fintech companies engaged in the business of banking”—a concept currently being contested by both the Conference of State Bank Supervisors (CSBS) and the New York Department of Financial Services (NYDFS). According to Noreika, the OCC has not yet decided whether it will exercise its authority to issue special purpose bank charters. (See previous InfoBytes coverage of CSBS’ and NYDFS’ challenges here and here.)
Finally, Noreika offered support for a legislative approach that would clarify the “valid when made” doctrine central to Madden v. Midland Funding, LLC by reducing uncertainty in establishing that “the rate of interest on a loan made by a bank, savings association, or credit union that is valid when the loan is made remains valid after transfer of the loan” and serving to reestablish a legal precedent that had been in place prior to the Madden decision, in which an appellate panel held that a nonbank entity taking assignment of debts originated by a national bank is not entitled to protection under the National Bank Act from state law usury claims. (See previous InfoBytes coverage here.)
Senators Introduce Legislation to Override Second Circuit’s Decision in Madden v. Midland
On July 27, a bipartisan group of senators introduced draft legislation (S. 1642), which would require bank loans, sold or transferred to another party, to maintain the same interest rate. As previously covered in InfoBytes, similar legislation (H.R. 3299) was introduced in the House earlier in July to reestablish a “legal precedent under federal banking laws that preempts a loan’s interest as valid when made.” Both measures come as a reaction to the 2015 Second Circuit decision in Madden v. Midland Funding, LLC, in which an appellate panel held that a nonbank entity taking assignment of debts originated by a national bank is not entitled to protection under the National Bank Act from state-law usury claims. The draft legislation seeks to amend the Revised Statutes, the Home Owners’ Loan Act, the Federal Credit Union Act, and the Federal Deposit Insurance Act.
OCC Requests Pre-Motion Conference to Discuss NYDFS Fintech Challenge
On July 25, acting U.S. Attorney for the Southern District of New York, Joon H. Kim, filed a letter with the federal court in that district on behalf of the OCC, requesting a pre-motion conference to discuss its anticipated motion to dismiss the New York Department of Financial Service’s (NYDFS) suit against the OCC’s special purpose fintech charter. See Vullo v. Office of the Comptroller of the Currency, Case 17-cv-03574 (S.D.N.Y., Jul. 25, 2017). As previously covered in InfoBytes, NYDFS filed the lawsuit May 12 on the grounds that the charter is unlawful and would grant preemptive powers over state law. Kim cites the following three reasons for dismissal of NYDFS’s complaint:
- NYDFS lacks standing to bring the suit because, although the OCC has “publically [sic] contemplated the possibility of issuing fintech charters…those public statements do not amount to a ‘final agency action’ subject to challenge under the [Administrative Procedure Act].” Indeed, since any harm NYDFS can identify is “conjectural or hypothetical,” and it has not suffered any “actual or imminent” injury, the Court lacks subject matter jurisdiction.
- OCC’s interpretation of its statutory authority under the National Bank Act (NBA) refers to Section 5.20(e)(1), which “reasonably limits the issuance of charters to institutions that carry on at least one of three ‘core banking activities’ [such as] the receipt of deposits, the payment of checks, or the lending of money.” Thus, regulations that allow chartering approvals—even if the chartered companies don't take deposits—is reasonable because they carry on at least one core banking function.
- The Supremacy Clause of the U.S. Constitution would protect fintech banks chartered under the relevant OCC rules and entitle them to NBA protections against state interference. Kim noted that it “is well established that the Supremacy Clause operates in concert with the NBA to displace state laws or state causes of action that conflict with federal law or that prevent or significantly interfere with national bank powers.”
The OCC faces a separate fintech lawsuit in the District Court for the District of Columbia brought by the Conference of State Bank Supervisors. (See previous Special Alert.)
Legislation Introduced to Codify “Valid When Made” Doctrine
On July 19, Representative Patrick McHenry (R-N.C.), the Vice Chairman of the House Financial Services Committee, and Representative Gregory Meeks (D-N.Y.) introduced legislation designed to make it unlawful to change the rate of interest on certain loans after they have been sold or transferred to another party. As set forth in a July 19 press release issued by Rep. McHenry’s office, the Protecting Consumers’ Access to Credit Act of 2017 (H.R. 3299) would reaffirm the “legal precedent under federal banking laws that preempts a loan’s interest as valid when made.”
Notably, a Second Circuit panel in 2015 in Madden v. Midland Funding, LLC overturned a district court’s holding that the National Bank Act (NBA) preempted state law usury claims against purchasers of debt from national banks. (See Special Alert on Second Circuit decision here.)The appellate court held that state usury laws are not preempted after a national bank has transferred the loan to another party. The Supreme Court denied a petition for certiorari last year. According to Rep. McHenry, “[t]his reading of the National Bank Act was unprecedented and has created uncertainty for fintech companies, financial institutions, and the credit markets.” H.R. 3299, however, will attempt to “restore[] consistency” to lending laws following the holding and “increase[] stability in our capital markets which have been upended by the Second Circuit’s unprecedented interpretation of our banking laws.”