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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.
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.
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.
On October 9, the OCC responded to a letter written by 26 Republican members of the House Financial Services Committee urging the agency to update its interpretation of the definition of “interest” under the National Bank Act (NBA) to limit the impact of the U.S. Court of Appeals for the Second Circuit’s 2015 decision in Madden v. Midland Funding, LLC (covered by a Buckley Special Alert here). The representatives’ letter (covered by InfoBytes here) argued that Madden deviated from the longstanding valid-when-made doctrine—which provides that if a contract that is valid (not usurious) when it was made, it cannot be rendered usurious by later acts, including assignment—and has “caused significant uncertainty and disruption in many types of lending programs.” The representatives urged the OCC to prioritize a rulemaking to address the issue. In response, the OCC agreed with the letter’s concerns, and stated that “administrative solutions to mitigate the consequences of the Madden decision may be available.” The OCC noted that it has filed amicus briefs in the past, reiterating the view that Madden was wrongly decided, but did not elaborate any further on potential plans for a rulemaking to address the issue.
On September 19, 26 Republican members of the House Financial Services Committee wrote to the OCC, urging the agency to update its interpretation of the definition of “interest” under the National Bank Act (NBA) to limit the impact of the U.S. Court of Appeals for the Second Circuit’s 2015 decision in Madden v. Midland Funding, LLC (covered by a Buckley Special Alert here). The letter argues that Madden deviated from the longstanding valid-when-made doctrine—which provides that if a contract that is valid (not usurious) when it was made, it cannot be rendered usurious by later acts, including assignment—and has “caused significant uncertainty and disruption in many types of lending programs.” Specifically, the letter asserts that the decision “threatens bank-fintech partnerships” that may provide better access to capital and financing to small business and consumers. The letter acknowledges the recently filed amicus brief in the U.S. District Court for the District of Colorado by the OCC and the FDIC, which criticized the Madden decision for disregarding the valid-when-made doctrine and the “stand-in-the-shoes-rule” of contract law (previously covered by InfoBytes here), and requests that the OCC prioritize rulemaking to address the issue.
On September 10, the FDIC and the OCC filed an amicus brief in the U.S. District Court for the District of Colorado, supporting a bankruptcy judge’s ruling, which refused to disallow a claim for a business loan that carried a more than 120 percent annual interest rate, concluding the interest rate was permissible as a matter of federal law. After filing bankruptcy in 2017, a Denver-based business sought to reject the claim under Section 502 of the Bankruptcy Code, and sought equitable subordination under Section 510 of the Code, arguing that the original promissory note, executed by the debtor and a Wisconsin state chartered bank, and subsequently assigned to a nonbank lender, was invalid under Colorado’s usury law. The bankruptcy judge disagreed, declining to follow Madden v. Midland Funding, LLC (covered by a Buckley Special Alert here). The judge concluded that the promissory note was valid under Wisconsin law when executed as that state imposes no interest rate cap on business loans, and the assignment to the nonbank lender did not alter this, stating “[i]n the Court’s view, the ‘valid-when-made’ rule remains the law.” The debtor appealed the ruling to the district court.
In support of the bankruptcy judge’s opinion, the FDIC and the OCC argue that the valid-when-made rule is dispositive. Specifically, the agencies assert that the nonbank assignee may lawfully charge the 120 percent annual rate, because the interest rate was non-usurious at the time when the loan was made by the Wisconsin state chartered bank. Moreover, the agencies state that it is a fundamental rule of contract law that “an assignee succeeds to all the assignor’s rights in the contract, including the right to receive the consideration agreed upon in the contract—here, the interest rate agreed upon.” Hence, the nonbank lender inherited the same contractual right to charge the annual interest rate. The agencies also argue that the Federal Deposit Insurance Act’s provisions regarding interest rate exportation (specifically 12 U.S.C. § 1831d) requires the same result, noting that “Congress intended to confer on banks a meaningful right to make loans at the rates allowed by their home states, which necessarily includes the ability to transfer those rates.” The agencies conclude that the bankruptcy judge correctly rejected Madden, calling the 2nd Circuit’s decision “unfathomable” for disregarding the valid-when-made doctrine and the “stand-in-the-shoes-rule” of contract law.
On September 10, the U.S. District Court for the Southern District of New York issued a final order and judgment to approve a class action settlement agreement, which ends litigation dating back to 2011 concerning alleged violations of state usury limitations. As previously covered by InfoBytes, the plaintiffs brought claims against a debt collection firm and its affiliate alleging violations of the FDCPA and New York state usury law when the defendants attempted to collect charged-off credit card debt with interest rates above the state’s 25 percent cap that was purchased from a national bank. In 2017, upon remand following the 2nd Circuit’s decision 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 (covered by a Buckley Special Alert here), the district court certified the class and allowed the FDCPA and related state unfair or deceptive acts or practices claims to proceed.
Following a fairness hearing, the court granted the parties’ joint motion for final approval, which divides the approximately 58,000 class members into two subclasses: claims alleging state-law violations, and claims alleging FDCPA violations. Under the terms of the settlement, the defendants are required to, among other things, (i) provide class members with $555,000 in monetary relief; (ii) provide $9.2 million in credit balance reductions; (iii) pay $550,000 in attorneys’ fees and costs; (iv) pay class representatives $5,000 each; and (v) agree to comply with all applicable laws, regulations, and case law regarding the collection of interest, including the collection of usurious interest.
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- Jonice Gray Tucker to discuss "Consumer financial services" at the Practising Law Institute Banking Law Institute