The Republican members of the House Financial Services Committee have sent a letter to Comptroller of the Currency Joseph Otting urging the OCC to make action to address the uncertainty created by Second Circuit’s Madden decision “a priority on the OCC’s rulemaking agenda.”
In Madden, the Second Circuit ruled that a purchaser of charged-off debts from a national bank was not entitled to the benefits of the preemption of state usury laws under Section 85 of the National Bank Act (NBA). In so ruling, the Second Circuit refused to apply the longstanding “valid-when-made” doctrine, under which an interest rate that is non-usurious when the loan is made remains non-usurious despite assignment of the loan.
In their letter, the lawmakers indicate that they “appreciate the OCC’s and the FDIC’s expression of support for the ‘valid when made’ doctrine in the agencies’ recent amicus brief filed to the U.S. District Court of Colorado in Rent-Rite Super Kegs, Ltd. v. World Business Lenders, LLC.” In the brief, the agencies argued that the district court should affirm the decision of a bankruptcy court holding that a non-bank loan assignee could charge the same interest rate the bank assignor could charge under Section 27(a) of the Federal Deposit Insurance Act (which was modeled on NBA Section 85) despite the Second Circuit’s Madden decision.
Observing that the uncertainty created by Madden has “hinder[ed] the efficient and effective operation of credit markets and impedes fintech innovation,” the lawmakers ask for a “administrative solution” to mitigate the consequences of Madden. They specifically reference the OCC’s “authority to update its interpretation of the definition of ‘interest’ under the [NBA] to ensure that our nation’s policies governing usury laws are applied on a clear and consistent basis nationwide.”
We have similarly advocated for the OCC’s adoption of a rule to confirm the valid-when-made doctrine. We have also advocated for the OCC’s adoption of a rule to address a second source of uncertainty for some loans that are made by banks with substantial origination, marketing and/or servicing assistance from nonbank third parties and then sold shortly after origination, namely “true lender” challenges. Such loans have been challenged by regulators and others on the theory that the nonbank agent is the “true lender,” and therefore the loan is subject to state licensing and usury laws. We believe the OCC should adopt a rule providing that (1) loans funded by a bank in its own name as creditor are fully subject to Section 85 and other provisions of the NBA for their entire term; and (2) emphasizing that banks that make loans are expected to manage and supervise the lending process in accordance with OCC guidance and will be subject to regulatory consequences if and to the extent that loan programs are unsafe or unsound or fail to comply with applicable law. In other words, it is the origination of the loan by a national bank (and the attendant legal consequences if the loans are improperly originated), and not whether the bank retains the predominant economic interest in the loan, that should govern the regulatory treatment of the loan under federal law.