On January 21, 2020, twenty-two State Attorneys General and the Hawaii Office of Consumer Protection submitted a comment letter to the Office of the Comptroller of the Currency (OCC) in opposition to its proposed rulemaking to resolve the “confusion” stemming from the Second Circuit’s 2015 decision in Madden v. Midland Funding LLC.1 As detailed in our prior client alert, in November 2019, the OCC proposed to clarify that when a bank sells, assigns, or otherwise transfers a loan (including to a non-bank entity), the interest rate applicable to the loan prior to the transfer would continue to apply following the transfer. The OCC largely relies on the common law “valid when made” principle as a basis for its rulemaking. Under the “valid when made” doctrine, loan terms that are valid when a loan is made remain valid loan terms until the loan is satisfied or forgiven, irrespective of whether, or to whom, the loan is sold. A non-usurious loan, therefore, does not become usurious upon assignment or transfer. The OCC’s proposed rule was followed by a similar rule proposed by the FDIC.
The proposed rulemaking attempts to address uncertainty caused by the Madden decision regarding the validity of interest rates of bank-originated loans sold in the secondary market. Madden centered on a credit card debt originated by a national bank that was sold to an unaffiliated third-party debt collector, who then sent Madden – a New York resident – a collection notice seeking to recover the debt at an interest rate that would have violated New York’s usury cap, if the debt were originated by the debt collector. At issue in the case was whether the interest charged by the debt collector was protected from state usury laws under the National Bank Act (NBA) because the debt was originated by a national bank. Under the NBA, a bank may charge the maximum interest rate permissible in the state in which it is located and “export” that interest rate to borrowers in other states. The Second Circuit concluded that the NBA did not preempt Madden’s state law usury claims and the debt collector was not permitted to charge interest in excess of New York’s usury law because application of New York’s usury law to debts originated by national banks would not “significantly interfere with a national bank’s ability to exercise its power under the NBA.”
In their letter challenging the OCC’s proposed rule, the State Attorneys General take the position that the OCC’s rule exceeds the agency’s authority and is contrary to the statutory scheme outlined by Congress under the NBA. They further contend that Sections 85 and 1463 of the NBA only grant national banks and savings associations the ability to charge the interest rates allowed by the laws of the state in which they are located. Other entities – including non-bank entities – are not afforded such powers under the NBA. The State Attorneys General also assert that the OCC failed to comply with the procedural and substantive requirements imposed by the Dodd-Frank Act, including the requirement to consult with the Consumer Financial Protection Bureau and to make determinations on a “case-by-case basis.” Additionally, the State Attorneys General take the position that the OCC’s proposed rule violates the Administrative Procedure Act for the reason that it is “arbitrary and capricious,” because it fails to address significant consequences of the proposed rule, including the effect the proposed rule would have on “rent-a-bank” arrangements.2 In the view of the State Attorneys General, the national bank or savings association would enter into a relationship with a non-bank entity to enable the non-bank entity to avoid state usury laws.
Comments on the OCC’s proposed rule were due on January 21, 2020, and it remains to be seen whether, and the extent to which, the states’ views will influence the OCC’s proposed rule. The proposed rule in its current form would greatly facilitate the secondary loan market by removing uncertainty regarding the appropriate interest rate applicable to purchased or assigned loans. While marketplace lenders may take comfort in the codification of the “valid when made” rule, the OCC’s proposed rule does not address the question of which entity is the “true lender” when a bank makes a loan and assigns or sells the loan to a third party. Therefore, recent judicial decisions finding that the party with the “predominant economic interest” is the “true lender” could continue to create some uncertainty for marketplace lenders or others in the secondary market.
Footnotes
1 Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015), cert. denied, 136 S. Ct. 2505 (2016).
2 The FDIC’s proposed rule, unlike the OCC’s proposed rule, does address the effects the proposed rule would have on partnerships for loan origination between banks and non-bank partners. See 84 Fed. Reg. 66845, 66850.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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