As previously reported, the OCC recently adopted a final rule (the “Madden fix”) designed to resolve the legal uncertainty created by the Second Circuit’s decision in Madden v. Midland Funding, which held that a non-bank that purchased charged-off loans from a national bank could not charge the same rate of interest on the loans that the national bank charged under Section 85 of the National Bank Act (NBA).  The Madden fix codifies the position of the Office of the Comptroller of the Currency (OCC) under Section 85 and 12 U.S.C. §1463(g) (a near-identical provision of the Home Owners’ Loan Act (HOLA)) that the assignee of a loan made by a national bank or federal savings association may charge the same interest rate that the bank or savings association is authorized to charge under federal law.  It amends 12 CFR part 7 and part 160 to add, respectively, Section 7.4001(e) and Section 160.110(d), which provide:

Interest on a loan that is permissible under [12 U.S.C. 85] [12 U.S.C §1463(g)(1)] shall not be affected by the sale, assignment, or other transfer of the loan.

In a lengthy complaint filed on July 29, 2020, the States of California, Illinois and New York sued the OCC to set aside the “Madden fix,” claiming that it is “arbitrary, capricious, an abuse of discretion, or otherwise contrary to law,” “in excess of statutory jurisdiction, authority, or limitations, or short of statutory right,” and taken “without observance of procedure required by law.”  The AGs’ central allegations are:

  • The plain language of Section 85 and 12 U.S.C. §1463 applies only to interest that a national bank or federal savings association may charge.  Allegedly, the OCC’s rule represents an expansion of the NBA’s and HOLA’s preemption of state law interest rate caps by extending the preemption to all entities that purchase loans originated by national banks or federal savings associations.  As such, the rule transforms the preemptive authority that Congress granted to national banks and federal savings associations “into a salable asset, available to any buyers willing to pay [a national bank or federal savings association] for the privilege of charging interest in excess of state law.”
  • Madden did not create legal uncertainty because no federal court of appeals has ever held that Section 85’s interest rate preemption extends to loan purchasers and Madden has not resulted in a disruption of lending.
  • “Valid-when-made” is a theory “concocted” by the OCC that conflicts with the plain text of Section 85 and 12 U.S.C §1463.  In this regard, the complaint dismisses as factually distinguishable two “archaic” Supreme Court cases that broadly stated that “a contract, which, in its inception, is unaffected by usury, can never be invalidated by any subsequent usurious transaction.”
  • The Madden fix language has been added to regulations using the word “preemption” in their titles but the OCC did not follow the requirements in 12 U.S.C §25b that apply to preemption determinations.
  • The OCC did not give meaningful consideration to the rule’s facilitation of “rent-a-charter” schemes by predatory lenders.
  • The OCC’s claim that the ability of national banks and federal savings associations to transfer loans to non-banks is an important source of liquidity is contrary to evidence in the administrative record and not supported by studies cited by the OCC.

It is clear that a tremendous amount of work and thought went into this complaint.  Nevertheless, we believe that it suffers from a number of serious flaws, including the following:

  • The complaint repeatedly states that the Madden fix conflicts with the plain language of Sections 85 and 1463(g)(1) but at most makes out the case that these statutes do not directly address the question of whether the usury authority provided by these statutes carries over loan assignees.
  • The complaint states: “At most, ordinary application of state law to non-banks could reduce the price that non-bank purchasers might be willing to pay national banks for their loans.”  This attempt to dismiss pricing impacts as insignificant simply doesn’t hold water.
  • In claiming that no appellate court has concluded that Section 85 carries over loan purchasers, the complaint ignores the Eighth Circuit decision in Krispin.
  • In attacking the OCC’s supposed failure to follow the special preemption determination rules adopted by the Dodd-Frank Act, the complaint ignores the distinction drawn by the Supreme Court in its Smiley decision, referenced by the OCC in the preamble to the rule, between interpretations regarding Section 85’s substantive scope and preemption determinations.

In comments on the complaint, the Attorneys General of New York and California also claim that the OCC’s Madden fix is motivated by political partisanship.  Those claims do not account for the fact that then-Comptroller Thomas Curry, in the Obama administration, took the same position as to Madden in an amicus brief to the U.S. Supreme Court:

A national bank’s power to charge the interest rate authorized by Section 85 includes the power to transfer a loan, including the agreed-upon interest-rate term, to an entity other than a national bank.

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A national bank’s federal right to charge interest up to the rate allowed by Section 85 would be significantly impaired if the national bank’s assignee could not continue to charge that rate.

We will closely follow developments in this case, as well as developments regarding the OCC’s proposed rule addressing “true lender” issues.