On Tuesday, February 8, in two separate rulings, a California federal district court upheld the “valid when made” rules promulgated by the Office of Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Corporation (“FDIC”), against challenges brought by the Attorneys General for several states.[1]
We previously discussed the significance of the OCC’s then-proposed rule to provide certainty to national banks seeking to transfer credit to non-bank counterparties (typically, fintech companies) following the Second Circuit’s decision in Madden v. Midland Funding, LLC[2] here. Madden held that non-bank assignees of loans originated by national banks did not enjoy the protections of the National Bank Act (“NBA”) and Home Owners Loan Act of 1933 (“HOLA”) regarding the permissibility of national banks and savings associations to transact loans with, as relevant here, “interest at the rates allowed by the laws of the State, Territory, or District where the bank is located.”[3] Section 27 of the Federal Deposit Insurance Act (“FDIA”) similarly provides that federally insured state-chartered banks “may, notwithstanding any State constitution or statute which is hereby preempted for purposes of this section, take, receive, reserve, and charge on any loan or discount made, or upon any note, bill of exchange, or other evidence of debt, interest … at the rate allowed by the laws of the State, territory, or district, where [they are] located ….”[4]
National banks and savings associations generally may “export” interest rates permissible by the banks’ home states to borrowers residing in other states, without regard to whether those interest rates would be permissible under the laws of those states.[5] States, however, may opt out of Section 27 of the FDIA, which would prohibit a state-chartered bank from charging interest on loans made in that state in excess of the state’s usury laws, even if the law of the state in which the state-chartered bank is located would allow for a higher interest rate.[6]
The OCC’s and FDIC’s “valid when made” rules under challenge provide in relevant part that the interest rates on loans originated by national banks and federally insured state-chartered banks, respectively, are not affected by transfers of those loans. The FDIC rule additionally makes clear that the permissibility of an interest rate on a loan is determined at the time it is made.[7]
The OCC Ruling
Concerned that non-bank counterparties to loan transfers would be able to evade the usury caps of the states in which they are located by partnering with national banks in other states and leveraging the banks’ ability to export rates, Attorneys General for the states of California, Illinois, and New York challenged the OCC’s final rule under the Administrative Procedure Act (“APA”). The plaintiffs advanced three principal arguments:
(1) that the OCC failed to follow procedures outlined in 12 U.S.C. § 25b, which provides in relevant part that “State consumer financial laws are preempted only if … the State consumer financial law prevents or significantly interferes with the exercise by the national bank of its powers; and any preemption determination under this subparagraph may be made by a court, or by regulation or order of the Comptroller of the Currency on a case-by-case basis …”;
(2) that the OCC exceeded its authority under 12 U.S.C. § 85 in promulgating the final rule; and
(3) that the final rule was arbitrary and capricious because, among other things, the OCC failed to consider the rule’s impact on facilitating potential evasion of state usury caps by non-bank counterparties and empirical evidence suggesting that Madden did not create the uncertainty in secondary credit markets that the rule purported to fix.
The district court first rejected the states’ arguments that the final rule triggered the process required by 12 U.S.C. § 25b, reasoning that the OCC’s promulgation of the rule did not require any “preemption determination” with respect to any state consumer financial law.[8] Further, the court accorded deference under Chevron U.S.A. v. Natural Resources Defense Council, Inc.,[9] to the OCC’s determination that the terms of 12 U.S.C. § 85 did not foreclose a rulemaking addressing the effect of a transfer on the interest rate of a loan that comports with the originating bank’s state usury laws to a counterparty residing in a state where that interest rate runs afoul of that state’s usury statute. Finally, the court held that the OCC did not act in an arbitrary and capricious manner in promulgating the final rule, noting that the administrative record before the court reflected the OCC’s consideration of concerns that the rule would facilitate predatory lending by non-bank assignees that could avail themselves of interest rates set by originating banks and that the rule was necessary to remedy uncertainty in the wake of the Madden decision.
The FDIC Rules
The district court’s order on the FDIC rule addressed similar arguments made under the APA by the states as in the OCC action,[10] and accordingly, incorporated some of the analysis in its companion order on the OCC rule. As in the OCC action, the court found that the portion of the final rule under challenge did not purport to regulate a transferee’s conduct or affect an interest rate after completion of a transfer, and therefore was not promulgated in violation of the FDIC’s statutory authority under 12 U.S.C. § 1831(g). And because the court found that terms of 12 U.S.C. § 1831(g) are silent on when the permissibility of an interest rate should be determined and the impact of a loan transfer on an interest rate, the court applied Chevron deference to hold that the FDIC’s rule was a reasonable construction of its authority under 12 U.S.C. § 1831(g), and, further, was neither arbitrary nor capricious.[11]
Takeaways
Assuming the OCC final rule stands and survives any further challenge, transferor banks subject to 12 U.S.C. § 85 need not do anything to alter the interest rate on loans they seek to transfer to third parties. The court, however, observed that “the Final Rule does not purport to regulate changes to the interest rate or to regulate the transferee’s conduct once that transaction [with the bank] is consummated.”[12]
The court likewise noted that the ability of states to opt out of Section 27 of the FDIA remains unchanged by the FDIC’s final rule.[13] If counterparties to transfers of loans made by banks or savings associations subject to either the OCC or FDIC final rules lack assurances that they can stand fully in the shoes of the transferor banks without facing potential regulatory action by the states in which the counterparties are located, these rules may fail to resolve any uncertainties in the secondary credit market in the wake of Madden that they attempted to fix.
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[1] See Calif. v. The Office of the Comptroller of the Currency, No. 20-cv-05200-JSW, Dkt. No. 80 (N.D. Cal. Feb. 8, 2022); Calif. v. FDIC, No. 20-cv-05860-JSW, Dkt. No. 84 (N.D. Cal. Feb. 8, 2022). The OCC’s final rule is codified at 12 C.F.R. § 7.4001(e) and the portion of the FDIC’s final rule that was the subject of the states’ challenge is codified at 12 C.F.R. § 334.1(e).
[2] 786 F.2d 246 (2d Cir. 2015).
[3] See 12 U.S.C. §§ 85 (NBA), 1463(g) (HOLA) (permitting a savings association to “charge interest on any extension of credit … at the rate allowed by the laws of the State in which such savings association is located”).
[4] 12 U.S.C. § 1831(g) (FDIA).
[5] See, e.g., Marquette Nat. Bank of Minneapolis v. First of Omaha Serv. Corp., 439 U.S. 299, 301 (1978).
[6] See Federal Interest Rate Authority Rule, 85 Fed. Reg. 44,146, 44,153 (July 22, 2020).
[7] 12 C.F.R. § 331.4(e).
[8] OCC, No. 20-cv-05200-JSW, Dkt. No. 80 at *6-*7.
[9] 467 U.S. 837 (1984).
[10] The Attorneys General for California, Illinois, Minnesota, New Jersey, New York, North Carolina, Massachusetts, and the District of Columbia challenged the FDIC final rule.
[11] FDIC, No. 20-cv-05860-JSW, Dkt. No. 84 at *7-*11.
[12] FDIC, No. 20-cv-05860-JSW, Dkt. No. 84 at *11.
[13] FDIC, No. 20-cv-05860-JSW, Dkt. No. 84 at *2-3 (citing Federal Interest Rate Authority Rule, 85 Fed. Reg. 44,146, 44153 (July 20, 2020)).
