Closer Look: Federal Court Upholds OCC and FDIC Validity Rules

Delivering a significant victory for the financial services industry, a California federal judge has upheld “valid when established” rules promulgated by the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) in California v. OCCno. 4:20-cv-05200 (ND Cal. February 8, 2022) and California vs. FDIC, no. 4:20-cv-05860 (ND Cal. 8 February 2022). These rules sought to overturn the 2015 Second Circuit ruling in Madden Funding v. Midland— a ruling that class-action plaintiffs’ attorneys and state regulators have relied on to bring lawsuits challenging so-called “rent-a-bank” schemes between banks and third parties. The rules were finalized in June and July 2020 and established a clear rule that the interest rate charged on a bank loan can still be charged after the loan is sold to a third party.

Attorneys general in several states, including California, New York and Illinois, had challenged the rules in separate lawsuits against the OCC and FDIC, saying the rules facilitated so-called “rent-a” programs. -bank”. In the states’ view, the rules violate the Administrative Procedure Act because, among other reasons, the agencies (i) lacked the authority to promulgate the rules and (ii) arbitrarily and capriciously created a regulatory vacuum which will allow non-banks to ignore the interest of the state – price caps.

The court dismissed the states’ challenge, finding that banking regulators reasonably interpreted statutory shortcomings in federal banking laws, namely Section 85 of the National Bank Act and Section 27 of the Federal Insurance Act. – deposits. The rules do not regulate the conduct of non-banks because they simply allow a bank to sell a loan “without changing the interest rate at which [the bank] and the borrower initially agreed. The court also did not find the rules arbitrary and capricious. Far from creating a regulatory vacuum, the OCC reaffirmed its “firm” opposition to predatory lending – such as bank leasing schemes – reflected in existing guidelines, which set standards for third-party banking partnerships. Further, the FDIC “has not altered a state’s ability to opt out of [section 27’s and thus the rule’s] coverage” with respect to loans made in that state.

These decisions underlie the recognition that banks rely on the ability to sell loans as a source of liquidity, especially in times of economic stress. As the court observed, “it was not unreasonable” for banking regulators “to determine that greater certainty regarding the transfer of interest rates and a large transfer market would serve to promote safety and security. soundness of the national banking system”. Uncertainty in the absence of valid rules when established is not hypothetical. Rules met Second Circuit requirements crazy decision, which refused to recognize the principle of the validity of payment in the context of the sale by a national bank of a debt written off to a third party debt collector. Several amicus commentaries and briefs filed in support of the rules cite empirical studies concluding that crazy weakened the secondary loan market, leading to a considerable decline in the availability of credit for borrowers in the second channel. The court held that these and other comments “provide[] support for the “banking regulators’ view” that crazy has created uncertainty for members of the industry.

The decisions are also important for what they do not address: the “true lender” doctrine. This doctrine aims to determine which entity in a banking partnership with third parties is the supposed “true lender” for the purposes of assessing the validity of the interest rate of the loan. In October 2020, the OCC finalized a so-called true lender rule, which established a clear line standard for determining which entity makes a loan. But Congress repealed that rule under the Congressional Review Act. The repeal marked a return to a world of uncertainty caused by fact-intensive, multi-factor tests that some courts have applied to determine which entity makes a loan. Indeed, new lawsuits attacking banking partnerships have begun to drop crazy arguments in favor of arguments that the non-bank partner is the “true lender”. See, for exampleClass Action Complaint, Carpenter v. Opportunity Fin., LLC, no. 2:21-cv-09875 (CD Cal. 22 Dec. 2021). Now that the rules valid when made have been confirmed, this trend should continue.

Immediately after the rulings, Acting Comptroller of the Currency Michael Hsu issued a press release. Hsu warned that the “legal certainty” provided by the rulings “should be used for the benefit of consumers and not abused”. States have until April 11 to appeal the rulings to the Ninth Circuit. For now – and because no appeals have yet been filed – the rulings should further this same goal: by affirming the rules valid when issued, the rulings will help bring greater stability to the lending market. banks, providing a more reliable source of capital that allows banks to extend even more loans to underserved consumers.

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