The OCC has filed a reply in support of its cross-motion for summary judgment in the lawsuit filed by state AGs to enjoin the OCC’s final rule (Rule) purporting to override the Second Circuit’s Madden decision as to national banks and federal savings associations.  The filing of the OCC’s reply concludes the briefing on the motions for summary judgment filed by the AGs and the OCC.  A hearing on the motions is scheduled for March 19, 2021.

The OCC’s reply is its first filing in the case since President Biden’s inauguration.  The OCC is currently under the leadership of Acting Comptroller of the Currency Blake Paulson.  Mr. Paulson, the OCC’s Chief Operating Officer, became Acting Comptroller on January 14, 2021 upon the resignation of Acting Comptroller Brian Brooks.  President Biden has not yet nominated a new Comptroller of the Currency.  While we have speculated that a new Comptroller might want to revisit the Rule, that now seems unlikely in light of the OCC’s decision to continue to defend the Rule in the new filing rather than seek an extension to give the new Comptroller an opportunity to review the litigation.

In its new filing, the OCC makes the following principal arguments:

  • The AGs’ argument that the OCC does not have authority to issue the Rule because it would regulate the interest rate a non-bank can charge after a bank transfers a loan lacks merit.  This argument relies on the AGs’ mischaracterization of the Rule as preempting state interest rate caps for non-bank buyers of national bank loans.  Contrary to the AGs’ characterization, the Rule interprets Section 85 of the National Bank Act (NBA) which incorporates, rather than eliminates, state law.  The Rule regulates the conduct of national banks when they transfer loans by clarifying a statutory ambiguity in the interest rate authority of national banks.
  • The AGs incorrectly assert that the Rule must preempt state law because Section 85 affects the applicability of certain state laws.  Rather than preempt state law, the Rule interprets the substantive meaning of Section 85 by clarifying the scope of federal authority granted by Section 85.  As a result, the NBA provision (Section 25b) that establishes a standard for OCC preemption determinations does not apply.
  • The AGs incorrectly assert that the Rule overrides the plain language of Section 85 and 12 U.S.C. §1463 because those provisions, respectively, speak only to interest that a national bank or federal savings association may charge.  The narrow reading of these provisions urged by the AGs overlooks the relationship of these provisions to other provisions of federal banking law and case law that underscore the ambiguity of these provisions on their applicability to loan sales.
  • The AGs incorrectly assert that a specific delegation of authority from Congress is needed for the OCC to promulgate a rule regulating interest charged by non-bank buyers of national bank loans.  The absence of language in Section 85 regarding loan buyers constitutes an implicit delegation of Congressional authority to the OCC to interpret this statutory gap, particularly when viewed in conjunction with national banks’ recognized authority to make and assign contracts, the NBA’s deliberate facilitation of interstate lending, longstanding common law principles affirming the assignability of loan contracts, and the OCC’s history of issuing regulations interpreting Section 85’s substantive scope.
  • The Rule does not authorize the transfer of preemption to non-banks.  Section 85 determines the rate of interest a national bank can charge on a loan it makes.  The interest rate is reflected in the loan agreement.  Following legal precedent and historical practice, the OCC has concluded that when a national bank transfers a loan agreement, the transferee steps into the shoes of the bank and can enforce the terms of the loan agreement.  A non-bank obtains no national bank powers as a result of holding a loan originated by a national bank.  Instead, the Rule simply confirms the concept that the originally-agreed upon interest rate, reflected in the loan contract, endures after assignment.
  • The OCC Rule is not arbitrary and capricious because it is based on speculation and contradicted by evidence in the record.  Rather, it is supported by record evidence and the OCC’s supervisory experiences.  The Administrative Procedure Act does (APA) not require the OCC to develop and rely on detailed statistical evidence as part of the rulemaking process.  The APA only requires an agency to justify a rule with a reasoned explanation.  The OCC’s concerns about Madden’s negative impact on credit markets provided a reasoned explanation for the Rule.
  • The Rule is not arbitrary and capricious due to the OCC’s failure to consider relevant factors as required by the APA.  Contrary to the AGs’ assertion that the OCC failed to consider the Rule’s impact on facilitating predatory lending arrangements between national banks and non-banks, the OCC did acknowledge and consider this concern.  However, in balancing the policy considerations, the OCC concluded it was reasonable to issue the Rule.

The OCC’s final “true lender” rule has also been challenged by a group of state AGs in a lawsuit filed in January 2021 in a New York federal district court.   In its reply brief, the OCC distinguishes the “true lender” rule from its Madden-fix rule, noting that the Madden-fix rule only applies when a bank is the “true lender.”  The OCC states that, “[a]ccordingly, the [Madden-fix] Rule and the “True Lender” rule stand on their own merit.”