James Stevens, Partner, Troutman Sanders
Jake Lutz, Partner, Troutman Sanders
Mark Dabertin, Counsel, Pepper Hamilton
Greg Rubis, Counsel, Pepper Hamilton
Rick Eckman, Senior Counsel, Pepper Hamilton

The OCC’s new rule titled “Permissible Interest on Loans That Are Sold, Assigned, or Otherwise Transferred” (the Permissible Interest Rule) states that a national bank “may transfer a loan without impacting the permissibility or enforceability of the interest term in a loan contract, thereby resolving the legal uncertainty created by the Madden decision.” The OCC has repeatedly asserted that the Second Circuit’s 2015 Madden v. Midland Funding decision was wrongly decided because it failed to recognize the uncodified “valid when made” rule. In September 2019, the OCC joined with the FDIC in submitting an amicus brief in connection with the appeal of a bankruptcy decision in the U.S. District Court for the District of Colorado that involved Madden issues. In that brief, the agencies asserted that “Madden is not just wrong; it is unfathomable.” The OCC issued a proposed rulemaking endorsing the valid-when-made rule on November 21, 2019,[1] and the final Permissible Interest Rule was published in the Federal Register on June 2.

In Madden, the Second Circuit Court of Appeals held that the defendant debt buyers were not entitled to charge the rate of interest stated in the plaintiff’s credit card agreement — which was usurious in New York, where the plaintiff resided — because the defendants were acting “solely on their own behalves, as the owners of the debt” and not on behalf of any bank. As a result, according to the Madden court, the defendants could not rely on the bank/maker of the loan’s ability under federal law to “export” its home state’s interest rate to other states. This failure by the court to find that the defendants had stepped into the shoes of the bank as assignees of the loan ignored what acting Comptroller of the Currency, Bryan Hubbard, described as the “centuries old doctrine of valid when made.”

In the five years since Madden was decided, the case has been cited as precedent in additional contexts beyond its specific facts. As the OCC notes in its preamble to the Permissible Interest Rule, “there are ongoing cases challenging the interest charged on securitized credit card receivables.” Furthermore, the “true lender” lawsuits brought in early 2017 against Avant of Colorado LCC and Marlette Funding LLC, respectively, by the Administrator of the Colorado Uniform Consumer Credit Code both cited Madden for the general proposition that a bank cannot validly assign federal interest rate exportation to a nonbank.

In the preamble to the final rule, the OCC takes care to characterize its action as a “reasonable interpretation of section 85” of the National Bank Act driven by the need to resolve statutory “silence.” The OCC notes that its rule is an interpretation of a statute that has proved “ambiguous as to its application to loan transfers,” as evidenced by Madden and its progeny, and cites the U.S. Supreme Court’s decision in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. for the level of judicial deference the new rule should be accorded. This distinction by the OCC is important because multiple lawsuits challenging the rule are expected to be forthcoming. Under the Chevron standard, which is the highest level of deference given to interpretations by agencies, the interpretation of an ambiguous statute will be upheld so long it represents a “permissible construction of the statute.”

The preamble addresses a number of legal arguments made in comments opposing the OCC’s rulemaking, many of which are likely to resurface in lawsuits challenging the rule’s validity. Among those arguments is the position that section 85 is not ambiguous in its silence regarding how the exercise of a national bank’s statutory authority to transfer a loan affects the loan’s interest rate. This argument is based on the position that the National Housing Act, and the legislative history of that act in particular, as opposed to its statutory language, has clearer authority regarding the effects of loan transfers on the interest rate. In this regard, after first noting that neither the National Bank Act nor the National Housing Act contains express language negating the need for agency interpretation, the preamble cites case law for the position that silence in a statute may indicate that Congress intended to give the administering agency the discretion to interpret it. The preamble then explains the reasons why the OCC’s valid-when-made interpretation of section 85 is reasonable, including because it will facilitate safety and soundness.

The preamble next considers the argument that the rule is subject to section 25b of the National Bank Act, which mandates that the OCC adhere to certain substantive and procedural requirements in making determinations that a state consumer financial law is federally preempted. In this regard, the preamble cites U.S. Supreme Court cases for the position that interpreting the meaning of a statute is separate and apart from “the question of whether a statute is preemptive.” In addition, the preamble notes that section 25b(f) includes language stating that nothing “shall be construed as altering or otherwise affecting the authority conferred by section 85,” which the OCC interprets as providing clear authority for its ability to interpret that section without having to comply with section 25b.

The preamble then rejects various arguments that the OCC’s rulemaking fails to comply with the Administrative Procedures Act (APA), including because the OCC “did not provide evidence of the problem it seeks to remedy.” To this end, the preamble notes that the “APA’s arbitrary and capricious standard [only] requires an agency to make rational and informed decisions based on the information before it.” Therefore, in light of the “clear evidence of current legal uncertainty” the OCC is facing, it has made “a rational and informed decision to issue this rule.”

Lastly, in response to the argument that the Permissible Interest Rule will result in increased predatory lending, the preamble notes that “[n]othing in this rulemaking in any way alters the OCC’s strong position on this issue, nor does it rescind or amend any related OCC issuances.” On this point, the preamble adds that “appropriate third-party relationships play an important role in banks’ operations and the economy,” citing to recent guidance the OCC has issued regarding the effective risk management of these relationships.

Finally, in response to requests from commenters that the OCC clarify the circumstances under which a national bank is the “true lender,” the preamble states that a such a test “would raise issues distinct from, and outside the scope of, this narrowly tailored rulemaking.”

Key Points

  • The OCC paid special attention to defending its action in the preamble to the final rule. This indicates that the validity of the new Permissible Interest Rule, which adopts the valid-when-made doctrine, is likely be challenged in lawsuits. Therefore, despite the OCC’s stated goal, the uncertainty caused by Madden is unlikely to be resolved soon. On the other hand, the OCC has staked out a well-reasoned, defensible position for why the valid-when-made rule should eventually be universally recognized as the “law of the land.”
  • Because the Permissible Interest Rule does not address the true lender issue, the rule is unlikely to prevent new true lender lawsuits. On the other hand, the OCC’s strong reminder in its final rule preamble that well-managed, third-party relationships are both essential to the business of banking and lawful, coupled with other recent OCC guidance discussing relationships between fintech providers and banks, should help banks and nonbanks in defending such lawsuits.
  • The FDIC should issue its own valid-when-made rule shortly. As the preamble to the Permissible Interest Rule discusses, the language of that rule and the FDIC’s expected rule are unlikely to be the same. For example, much of the FDIC’s proposed rule is devoted to addressing federal interest rate preemption in the context of interstate branch banking. However, the OCC’s preamble provides strong assurances that the two rules will be interpreted in pari materia despite any differences in wording or structure.

[1] The FDIC issued a similar proposed valid-when-made rule on December 6, 2019.