On January 5, 2021, the Attorneys General of New York, California, Colorado, the District of Columbia, Massachusetts, Minnesota, New Jersey, and North Carolina filed a voluminous Complaint in federal district court for the Southern District of New York against the OCC and Acting Comptroller of the Currency Brian Brooks, seeking to set aside the final “true lender” rule adopted by Acting Comptroller Brooks (the “Rule”), which became effective on December 29, 2020.

As discussed in our comment letter in support of the Rule, we believe the Rule, coupled with the OCC’s earlier “valid when made” rule (which has been challenged in court by the States of California, Illinois and New York), has the potential to benefit millions of consumers, as it would eliminate confusion, uncertainty, and legal risk for banks and their counterparties as they work together to make credit more readily available nationwide.  However, the AG plaintiffs in the new lawsuit instead view the Rule as “an unlawful attempt” by the OCC to “facilitate predatory lending” and support “rent-a bank schemes.”

The AGs’ Complaint borrows many policy-related arguments from the complaint challenging the OCC’s valid when made rule, and incorporates (and in some instances cites) elements from comment letters previously filed in opposition to the Rule when it was originally proposed, including a comment letter signed by 24 Democratic State AGs.

The new action alleges that the OCC violated the Administrative Procedure Act (“APA”) and argues that the court should set the Rule aside because it is (1) in excess of statutory jurisdiction, authority, and limitations, and short of statutory right; (2) arbitrary, capricious, an abuse of discretion, and otherwise not in accordance with law; and (3) an action taken without procedure required by law.

In support of its claims, the Complaint argues in detail that: (1) “the statutes relied upon by the OCC do not authorize it to preempt state laws”; (2) the statutory terms are clear and therefore not subject to administrative agency interpretation; (3) the Rule is an unreasonable interpretation of federal law, citing the Madden decision for the proposition that national banks enjoy preemption of state laws because they are subject to OCC oversight but that the Rule would enable preemption of state law for the benefit of unsupervised non-banks; (4) the OCC failed to comply with provisions of the Dodd-Frank Act imposing certain requirements on OCC actions preempting state consumer financial laws; and (5) the Rule is not entitled to deference, again citing the Dodd-Frank sections limiting OCC preemption of state consumer financial laws.

The Complaint also includes lengthy policy arguments, and statements scattered throughout claiming the OCC’s rulemaking process and responses to comment letter criticisms were flawed and inadequate.  To support the position that the adoption of the Rule is “arbitrary and capricious,” the Complaint claims that the Rule constitutes a reversal of prior longstanding OCC policy opposing “Rent-a-Bank schemes.”  The Complaint further avers that the OCC’s reliance on its robust oversight authority over national banks to prevent abusive practices in bank programs involving non-banks is unsupportable, and expresses doubt that the OCC uses its supervisory powers to prevent predatory lending.

The OCC anticipated and refuted many of the Complaint’s allegations in the Supplementary Information published with the final Rule.  In this regard, the Supplementary Information included: (1) an explanation supporting the OCC’s authority to interpret the statutes cited; (2) a lengthy discussion, echoed in the OCC General Counsel’s recent Interpretive Letter 1173 , explaining that the Dodd-Frank requirements relating to conflict preemption of a state consumer financial law are not applicable to the Rule; and (3) a discussion of why the rulemaking does not violate the APA.  A key passage in the Supplementary Information addresses the policy arguments advanced by the AGs in their Complaint:

In fact, this rulemaking would solve the rent-a-charter issues raised and ensure that banks do not participate in those arrangements.  As noted in the proposal, the OCC’s statutes and regulations, enforceable guidelines, guidance, and enforcement authority provide robust and effective safeguards against predatory lending when a bank exercises its lending authority.  This rule does not alter this framework but rather reinforces its importance by clarifying that it applies to every loan a bank makes and by providing a simple test to identify precisely when a bank has made a loan.  If a bank fails to satisfy its compliance obligations, the OCC will not hesitate to use its enforcement authority consistent with its longstanding policy and practice.

While this litigation certainly was expected, the nature of the OCC response remains to be seen, especially since a Comptroller appointed by President-elect Biden may well have views that differ from those of Acting Comptroller Brooks.  The possibility of a settlement including elements such as additional rulemaking should not be disregarded.

Of course, this new lawsuit is not the only (or perhaps most serious) risk to the Rule.  In addition to the possibility of a revocation of the Rule through new rule-making, a challenge to the Rule under the Congressional Review Act seems almost certain in light of the assumption of Democrat control of the Senate, in addition to the House and the Administration.  The fight is only beginning.