August 3, 2020
Authored by: Benjamin Saul and Ross Handler
Just two months ago, the Office of Comptroller of the Currency (“OCC”) addressed the “valid when made” doctrine and held that interest rates established on bank-originated loans remain valid even after the loan is transferred to a non-bank partner. On July 29, the attorneys general of New York, California, and Illinois sued the OCC alleging federal overreach that undermines state-preemption regarding usury rate caps. Specifically, the AGs allege the OCC’s rule is “arbitrary and capricious” in violation of the Administrative Procedures Act. In the complaint, the AGs allege “[t]he rule is beyond the OCC’s power to issue, is contrary to statute and would facilitate predatory lending through sham ‘rent-a-bank’ partnerships designed to evade state law.”
Those tuned into the debate surrounding the “valid when made” rule saw this court battle coming. The OCC has recently worked to clarify disputed rules regarding privileges afforded to banks under the National Bank Act. Under the National Bank Act, national banks that are under the supervision of the OCC are permitted to charge interest on loans at the maximum rate permitted by their home state—even in instances where that interest rate would violate state usury laws. While federal law carves out this exception for federally regulated banks, it does not extend the same exemption to non-banks. Accordingly, the attorneys general have asked the Northern District of California to declare the rule invalid and hold that the OCC exceeded the authority granted to it by the National Bank Act and the Dodd-Frank Act.
As we noted in our post on the OCC’s final rule from May, we expected states to challenge the final rule and ask the courts to determine the level of deference to afford the OCC’s rulemaking authority. Marketplace lenders and their bank partners viewed the OCC’s final rule as an important and welcome step in easing the uncertainty created by the Madden decision, citing the way in which that decision limited access to credit markets and spawned litigation. Unfortunately, this state challenge to the OCC rule leaves industry participants in limbo until the case plays out in the courts. We will track those developments closely.