By Donielle Tigay Stutland, J.D.
Two amicus curiae briefs were filed in support of the OCC in a federal lawsuit filed by state attorneys general challenging an OCC rule that expressly provides that when a bank transfers a loan, the interest permissible before the transfer continues to be permissible after the transfer.
Two amicus curiae briefs were filed in connection with a July 2020 lawsuit brought by state attorney generals against the Office of the Comptroller or the Currency challenging the federal bank regulator’s interest rate rules. In June 2020, the OCC finalized its rule regarding permissible interest on loans that are sold, assigned, or transferred after origination. The rule was intended to solidify the doctrine that when a bank transfers a loan, the interest permissible before the transfer continues to be permissible after the transfer. Shortly thereafter, in July 2020, a group of state Attorneys General, including California Attorney General Xavier Becerra, Illinois Attorney General Kwame Raoul, and New York Attorney General Letitia James filed suit against the OCC, arguing that the OCC rule violates the Administrative Procedure Act because, among other things, it conflicts with the National Bank Act, fails to comply with requirements established by the Dodd-Frank Act, and exceeds the OCC’s statutory authority. In connection with summary judgment motions filed by both parties, amicus curiae briefs in support of the OCC were filed. On Jan. 22, 2021, the Marketplace Lending Association (MLA), as well as a consortium of bank trade groups, including: Bank Policy Institute, Structured Finance Association, American Bankers Association, Consumer Bankers Association, and Chamber of Commerce of the United States of America, submitted briefs in opposition to the state Attorneys General’s motion for summary judgment and in support of the OCC’s cross motion for summary judgment.
Background. Under federal banking law, federally regulated banks are exempt from state interest-rate caps. In Madden v. Midland Funding LLC, the Second Circuit called into question the preemption of the usury provisions under the National Bank Act when a non-bank purchases charged-off loans from a national bank. Under Madden, the court held that the interest term of a loan originated by a national bank and then sold depends on who holds the loan after it has been sold. The OCC promulgated a final rule in June 2020 that soucaght to override this holding, and provided that when a loan originated by a national or state bank is sold, assigned, or otherwise transferred to a non-bank, the interest permissible at origination remains permissible following the transfer.
The state AGs filed suit against the OCC, alleging that the rule would encourage predatory lending, by facilitating arrangements known as "rent-a-bank" schemes, in which heavily regulated state-chartered banks and national banking and savings associations enter into relationships with largely unregulated non-bank entities that allow the non-banks to evade state usury laws (see Banking and Finance Law Daily, July 30, 2020). The AGs contend that the OCC final rule would allow lending entities that would otherwise be subject to state interest-rate caps to charge consumers interest that far exceeds the rates permissible under state law. In the complaint, the state AGs argue that the OCC’s rule is overreaching, as it would extend National Bank Act preemption to non-banks. The AGs also argue the OCC rule violates the Administrative Procedure Act because, among other things, it conflicts with the National Bank Act, fails to comply with requirements established by the Dodd-Frank Act, and exceeds the OCC’s statutory authority.
MLA brief. The MLA filed an amicus brief in support of the OCC’s position. MLA strongly "urged" that the court uphold the OCC rule and protect partnerships between banks and financial technology companies (fintechs). The MLA is an association of banks, fintech companies, and investors operating in the marketplace lending industry. The MLA notes that fintechs and banks have long partnered in various lending operations, including consumer and student loans, small business loans, equipment financing, and lines of credit. MLA describes that, generally, fintechs use their technology and online platforms to market and process loans; banks then fund and originate the loans; and then often the fintech purchases the loan from the bank and either holds it, resells it into the secondary loan market, or packages it into a security that is then sold to an investor. By doing so, the MLA reports that a bank’s balance sheet and capital is then freed up to, "make more loans, often to underserved borrowers in underserved communities."
The MLA asserts that OCC rule is a reasonable interpretation of federal statutes which govern national banks in its incorporation of the "valid when made" principle. The MLA points to long-standing federal precedent of this rule, including Nichols v. Ferguson, in which the MLA notes, the Supreme Court characterized the "valid when made" principle as a "cardinal rule."
Additionally, the MLA argues that the OCC’s rule incorporating the "valid when made" principle is not arbitrary or capricious. The MLA discussed the vital role in marketplace of relationships between fintechs and banks, and notes that by codifying the "valid when made" principle, the OCC’s rule ensures that such partnerships remain a viable option for banks to "more efficiently meet customer needs" in their communities through online means. Further, MLA described the fintech/bank lending system and suggested this lending scheme is not predatory, serves the underbanked and unbanked, and is done at lower rates than pay-day lenders and credit card lenders: "the valid-when-made principle allows MLA’s members to make tens of billions of loans to underserved borrowers at an average personal loan APR of 15%, far less than the typical credit card interest rate."
Chamber amicus brief. A second amicus brief was filed by a consortium of banking industry trade groups. This group also strongly urged the court to grant summary judgment in favor of the OCC.
The Chamber brief noted that for almost 200 years, "the U.S. credit markets have relied on the cardinal rule that, if a loan is valid and not usurious in its inception, it cannot be rendered usurious subsequently, including by being sold or transferred to a third party." The brief argues that the OCC rule is consistent with the long-standing doctrine, federal laws such as the NBA and the HOLA, as well as consistent with general contract provisions regarding assignment and transfers.
Additionally, the Chamber brief argues that not only is the OCC rule not arbitrary and capricious, it actually will prevent harmful economic consequences. The brief offers a description of the loan securitization process and notes, that following the Madden holding, "would have substantially reduced the availability of credit and increased the costs of selling loans by requiring banks and loan purchasers to navigate a patchwork of state-law usury limits, modify loans that could potentially violate various usury laws, and otherwise reduce the pool of potential loan purchasers." The banking trade groups also posit that upholding Madden and clawing back at the OCC rule "threatens the safety and resilience of the banking system,". because a bank’s ability to sell its loans to third parties is a crucial liquidity and credit risk management tool. The trade groups note that there was ample evidence post-Madden of the harmto banks and the credit market industry, and that the OCC took the potential negative effects into account when drafting the rule, and thus, "acted well within its authority to ensure predictability and stability in the credit markets."
Companies: American Bankers Association; Bank Policy Institute; Chamber of Commerce of the United States of America; Consumer Bankers Association; Marketplace Lending Association; Structured Finance Association
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