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New York, California and Illinois Sue OCC to Block “Valid When Made” Rule

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. 

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OCC Proposes True Lender Rule

On July 20, 2020, the Office of the Comptroller of the Currency (“OCC”) issued a notice of proposed rulemaking that would determine the “true lender” of a national bank or federal savings association loan in the context of a partnership between a bank and a third party.  The proposed rule states that a bank is a true lender of a loan “if, as of the date of origination, it is named as the lender in the loan agreement or funds the loan” and would apply to all national banks and federal savings associations.  Most recently, the OCC addressed the related “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.  This final rule, however, did not address the true lender question, and this week’s proposed rule does just that.     

The OCC proposed this rule in response to the “increasing uncertainty” surrounding the legal principles that apply to the loans made in the course of bank and third party relationships.  Courts are not unified in their analysis and have looked to both “the form of the transaction” and a battery of fact-intensive tests to determine the true lender of a loan.  While federal rulemaking addresses many relationships between banks and third parties such as making payments and taking deposits, there is not much guidance on these relationships as it relates to lending.  See e.g., 12 CFR 5.20(e).  Per the OCC’s proposed rule, this uncertainty “may discourage banks and third parties from entering into relationships, limit competition, and chill the innovation that results from these partnerships.”  Taken together, these unintended consequences would restrict consumer access to affordable and available credit. 

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The JOBS Act and SEC Deregistration: New Thresholds and Special Considerations for Banks and Bank Holding Companies


The Jumpstart Our Business Startups Act (the “JOBS Act”), which was enacted on April 5, 2012, established, among other things, new shareholder headcount thresholds relating to SEC registration. For banks and bank holding companies (“BHCs”), registration and reporting under Section 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is required for any class of securities held by more than 2,000 shareholders of record as of the end of a given fiscal year, and deregistration is permitted for any class of securities held by fewer than 1,200 shareholders of record under the timing rules described below. The reports in question include annual (10-K), quarterly (10-Q) and periodic (8-K) reports; proxy statements; Forms 3, 4 and 5; Schedule 13D and 13G reports; and other reports required under the Exchange Act.

The JOBS Act allows a bank or BHC to terminate its registration under Section 12(g) of the Exchange Act effective 90 days after filing a Form 15 certifying that it has fewer than 1,200 shareholders of record. For a bank/BHC that currently has fewer than 1,200 shareholders of record, termination can be effected without a stock buyback, share reclassification or other “going-private” transaction. Instead, a board resolution, Form 8-K, press release and, if desired, a letter to shareholders would be all that would be required. This is frequently referred to as “going dark” or “turning off the lights.” The new thresholds also apply to going-private transactions, however, and banks and BHCs that did not previously have the resources to cash out a significant number of shareholders or that had more shareholders of record than could be accommodated reasonably in multiple classes of stock via a share reclassification transaction may wish to revisit the idea of going private in the wake of the JOBS Act.

A bank or BHC that terminates its Section 12(g) registration and reporting obligations will remain eligible to avoid re-registration and reporting so long as it has fewer than 2,000 shareholders of record (or 1,200 if it has ever previously filed a registration statement for an offering of securities under the Securities Act of 1933, as amended (the “Securities Act”)), at the end of a given fiscal year.  Examples of Securities Act registration statements include Forms S-1 (public offering), S-3 (short-form public offering), S-8 (employee benefit plans) and S-4 (business combinations). The different threshold for companies that have previously filed a registration statement arises from Section 15(d) of the Exchange Act, which requires such companies to file periodic reports under the Exchange Act for the remainder of the fiscal year in which a Securities Act registration statement was declared effective.

The decision to deregister involves balancing the advantages and disadvantages of “going dark” to the bank/BHC and its shareholders, and each bank or BHC will need consider the issues in light of its particular facts and circumstances. In general, relevant considerations include:

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Financial Services Update

Financial Services Update

November 22, 2010

Authored by: Matt Jessee

Debate Over Extension of Bush Tax Cuts Continues

On Thursday, House Majority Leader Steny Hoyer (D-MD) and House Speaker Nancy Pelosi (D-CA) told House Democrats at a closed door meeting that the House would vote before the end of the year on extending the Bush tax cuts for only those individuals making less than $250,000. However, even if such a measure were to pass in the House, it is unclear whether the Senate will agree to such a vote. There is still the possibility the bill may not pass the House if Republicans are able to successfully pass a procedural response, known as a “motion to recommit,” that could force a House vote on a full extension of the Bush tax cuts.  According to sources, Pelosi told President Barack Obama that House Democrats remain firmly committed to allowing Bush-era tax cuts to expire for earners making more than $250,000, which complicates the Administration’s efforts to reach a compromise with Senate Republicans.

Preview of Next Year’s Budget Fight

On Thursday, Senate Minority Leader Mitch McConnell (R-KY) announced he would oppose the pending omnibus appropriations bill, thereby forcing Congress to rely on another stopgap “continuing resolution,” or CR, to keep the government funded after December 3. If Republicans are able to block the omnibus spending bill, it would set up an early confrontation with President Obama next year over not just deeper cuts from the President’s 2011 budget but also tens of billions of dollars in rescissions from prior years. The White House is seeking a continuing funding resolution which would cover the next 10 months of the fiscal year until September 30, which would deny House Republicans a chance to defund portions of the healthcare bill early next year.

Fed Orders New Stress Tests

On Wednesday, the Federal Reserve announced plans to scrutinize the nation’s top 19 banks through a second round of “stress tests.” The stress tests will require the bank-holding companies to submit capital plans by early 2011 proving their capability to handle losses under a set of conditions including “adverse” economic conditions and continuing real estate-related problems. In its announcement, the Fed said it plans to perform such reviews regularly on an ongoing basis. The Fed also issued a road map for banks that want to raise dividends or buy back stock saying firms must show they have sufficient capital in place to withstand losses over the next two years and demonstrate an ability to satisfy new, tougher global capital requirements.

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