A Colorado state district court has ruled that a non-bank assignee of loans made by a state bank cannot charge the same interest rate that the state bank assignor can charge under Section 27(a) of the Federal Deposit Insurance Act (12 U.S.C. § 1831d(a)).

The ruling in Martha Fulford, Administrator, Uniform Consumer Credit Code v. Marlette Funding, LLC et al, arises from an enforcement action filed in 2017 by Colorado’s UCCC Administrator challenging a bank-model lending program involving a New Jersey state-chartered bank.  The Administrator asserted that the bank was not the “true lender” for loans originated in the program and that, under the Second Circuit’s decision in Madden v. Midland Funding, the bank’s power to export interest rates under federal law did not follow the loans it assigned to its non-bank partner.  For these reasons, the Administrator contended that the loans were subject to Colorado usury laws despite the fact that state interest rate limits on state bank loans are preempted by Section 27.  The case was removed to federal court by the non-bank partner and subsequently remanded.  (An identical enforcement action filed by the Administrator in connection with another bank-model lending program is still pending.)

In ruling on the Administrator’s Motion for Determination of Law on Statutory Interpretation of Section 27, the Colorado court noted that the Administrator had previously filed a Motion for Partial Summary Judgment in which she maintained her argument that the bank was not the “true lender” and that the non-bank partner was the originating lender.  However, for purposes of her Motion for Determination of Law, the Administrator argued that even if the bank was the “true lender,” it could not transfer its interest rate authority under Section 27 to the non-bank partner.

Section 27, which applies to state banks, is patterned after Section 85 of the National Bank Act, which applies to national banks.  Sections 27 and 85 allow banks to export to out-of-state borrowers the interest rate permitted by the state in which they are located to the state’s most favored lender, regardless of any contrary laws of the borrowers’ states.

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.  In the Colorado case, the court noted that Section 27 only refers to banks but makes no reference to non-bank entities.  It found the Second Circuit’s analysis of Section 85 in Madden “to be persuasive and applicable to this matter and analysis of Section 27.”  It rejected the argument that Section 27 should be construed in light of the valid-when-made doctrine because, in the court’s view, “Section 27 is clear that it applies to banks, and therefore, resort to interpretive rules of statutory construction is unnecessary.”  Its “analysis” was cursory.

Although the Colorado court’s decision was issued on June 9, the decision shows no awareness that several days earlier, on May 29, the OCC had issued a final rule that rejects the Second Circuit’s analysis in Madden and codifies the OCC’s interpretation of Section 85 that the assignee of a loan made by a national bank can charge the same interest rate that the bank is authorized to charge under federal law.  Rather, the decision acknowledges that both the OCC and FDIC had issued proposals rejecting Madden.  It stated: “While the Court accepts that these federal agencies are entitled to some deference, the fact is that the rule proposals are not yet law and the Court is not obligated to follow those proposals.”  (The FDIC has not yet acted on its proposal.)

Conceivably, the Colorado court would have ruled differently had it been aware of the final OCC rule (if, indeed, it was really unaware).  Nevertheless, it is surprising that the Colorado court was willing to ignore the views of the OCC and FDIC expressed in their proposals, given that they are the agencies charged with interpreting the relevant federal law provisions.  Under the Supreme Court’s leading Chevron decision, agency views are entitled to deference when a statute is ambiguous or silent on an issue.  Indeed, the U. S. Supreme Court previously held, in Smiley v. Citibank, 517 U.S. 735 (1996), that an OCC regulation interpreting Section 85  is entitled to deference.

The OCC’s final rule and the FDIC’s proposal rest on the agencies’ considered judgment that the authority of a bank to make and transfer loans carries with it the right of the assignee to charge a usury-exempted rate pursuant to Section 85 or Section 27.  In addition, contrary to the view expressed by the Colorado court, the valid-when-made doctrine does have a role in the proper interpretation of Section 85 and Section 27.  As both agencies have noted, the doctrine, which provides that a loan that is non-usurious at origination does not subsequently become usurious when assigned, is a tenet of common law that informs how Section 85 and Section 27 should reasonably be interpreted.

On June 19, 2020, from 12:00 p.m. to 1:00 p.m. ET, Ballard Spahr will hold a webinar, “The OCC’s Final Rule to Undo Madden: An Analysis and A Look Ahead.”  Click here for information about topics to be discussed (which will also include the Colorado decision) and to register.