Blog LenderLaw Watch August 18, 2020

California, Illinois and New York Sue OCC on “Valid When Made” Rule

On July 29, 2020, three states – California, Illinois, and New York – filed suit against the Office of the Comptroller of the Currency (OCC) in the U.S. District Court for the Northern District of California, challenging the OCC’s Rule on the “valid when made” doctrine.  The suit was filed as People of the State of California, et al. v. The OCC, Case No. 20-CV-5200 (Complaint).

As LenderLaw Watch has previously reported, the OCC recently issued a rule affirming the “valid when made” doctrine, clarifying that the determination of whether interest on a loan is permissible is determined when the loan is made and that a bank’s transfer of a loan to a third party does not impact the validity or enforceability of that interest.

In the Complaint, the states contend that the OCC’s issuance of the rule has violated the Administrative Procedures Act in that the OCC rule is (i) arbitrary and capricious, (ii) in excess of its statutory authority, and (iii) an agency action taken without observance of procedure required by law.

Many states, including California, Illinois, and New York, impose maximum interest rate caps to prevent lenders from charging excessive rates on consumer loans, which are intended to protect consumers from excessive interest rates that make it difficult for consumers to repay loans.  The three states raise concerns that the OCC’s rule would “facilitate predatory lending through sham ‘rent-a-bank’ partnerships designed to evade state law,” because it extends the preemption of state-law interest rate caps beyond national banks to “any entity – including non-banks – that purchases a loan from a Federally Chartered Bank.”

In support of its claim that the rule violates the Administrative Procedures Act, the states make the following arguments:

  • The OCC’s rule is contrary to the plain language of 12 U.S.C. § 85 and 12 U.S.C. § 1463(g)(1), as the plain language of these statutes applies only to the interest a national bank may charge and the OCC rules unlawfully and “unilaterally” extends this to all entities that purchase loans originated by national banks.
  • In issuing the rule, the OCC effectively overturns the Second Circuit decision, Madden v, Midland Funding, LLC, 786 F.3d 246 (2d Cir 2015), which it lacks the authority to do.
  • In issuing the rule, the OCC failed to meaningfully consider the rule’s inevitable facilitation of predatory “rent-a-bank” schemes by permitting lenders to evade state law by partnering with national banks.
  • The OCC’s rule is not entitled to the deference standard that agencies are generally entitled, and is only entitled to the lower standard of deference as Congress laid out in the Dodd-Frank Act.

The OCC’s rule was intended to resolve the legal uncertainty surrounding the “valid when made” principle; however, with this lawsuit, the market confusion remains.  This lawsuit may significantly impact the secondary market for loans originated by national banks.