The FDIC has issued its widely anticipated final rule resolving the uncertainty caused by the Second Circuit’s Madden v. Midland Funding decision. Madden held that a non-bank entity that purchased charged-off loans from a national bank could not charge the same rate of interest on the loans as the national bank was able to charge based on its authority under Section 85 of the National Bank Act (“NBA”).
The FDIC’s Notice of Proposed Rulemaking (“NPR”) was published the same week as an OCC proposed rule intended to address the same issue for national banks under Section 85. The OCC’s final rule was issued on May 29, 2020. Although the press release accompanying the FDIC’s final rule states that the “FDIC’s action mirrors” the OCC final rule, the two final rules are not identical in every respect.
In its discussion and analysis accompanying the final rule, the FDIC posited that Section 27 of the Federal Deposit Insurance Act (“FDIA”), which along with Section 24 of the FDIA establishes the statutory framework for the ability of state chartered insured depository institutions to enjoy parallel interest rate preemption and “most favored lender” benefits permitted for national banks under the NBA, contained two “statutory gaps.”
The FDIC’s first point of concern was that Section 27 does not explicitly state at what point in time the validity and enforceability of the interest rate term of a bank’s loan should be determined for purposes of that section. The second point was that while Section 27 expressly gives state banks the right to make loans at the rates permitted by their home states, the section “does not explicitly list all the components of that right. One such implicit component is the right to assign the loans made under the preemptive authority of Section 27.”
The FDIC’s final rule amends Part 331 of Title 12 of the Code of Federal Regulations by providing the following language in 12 CFR §331.4(e) that is intended to address the two “statutory gaps”:
(e) Determination of interest permissible under section 27. Whether interest on a loan is permissible under section 27 of the Federal Deposit Insurance Act is determined as of the date the loan was made. Interest on a loan that is permissible under section 27 of the Federal Deposit Insurance Act shall not be affected by a change in State law, a change in the relevant commercial paper rate after the loan was made, or the sale, assignment, or other transfer of the loan, in whole or in part.
In the FDIC’s discussion of comments submitted in response to its NPR, the FDIC reiterated that, while the common law principles of “valid when made” and “stand-in-the-shoes” are consistent with the FDIC’s interpretation of the statutes, such interpretation was not based on those doctrines, and that “as stated in the NPR, the FDIC’s authority to issue the proposed rule arises under Section 27 rather than common law.”
Also in keeping with its analysis as set forth in the NPR, the FDIC was careful in its discussion of the final rule to avoid the “true lender” issue. In rejecting the concept that the true lender doctrine was somehow necessarily linked with the issues clarified by the final rule, the FDIC held the view that “[w]hile both questions ultimately affect the interest rate that may be charged to the borrower, the FDIC believes that they are not so intertwined that they must be addressed simultaneously by rulemaking.”
While declining to address the “true lender” issue as part of this final rule, the FDIC did observe in response to comments raising the issue or urging rulemaking from the FDIC to address the issue that: (i) consideration of the true lender issue (albeit apart from this rulemaking) is warranted; (ii) the text of this regulation “cannot be reasonably interpreted to foreclose true lender claims”; and (iii) “the FDIC continues to support the position that it will view unfavorably entities that partner with a State bank with the sole goal of evading a lower interest rate established under the law of the entity’s licensing State(s).”
Acting Comptroller of the Currency Brian Brooks has stated publicly that the OCC will soon be issuing a proposed “true lender” rule and that he expects the FDIC to do the same. The FDIC’s comments seem to support that expectation, especially if the OCC in fact delivers such a rule.
Not surprisingly, reaction to the FDIC final rule has been swift. Certain consumer advocacy agencies have already released public statements condemning the final rule, and opining that both the FDIC’s rule and the OCC’s rule may face legal challenges. The consumer advocates believe the FDIC’s rule will encourage the proliferation of abusive high-rate lending by providing an avenue for non-bank lenders to avoid state interest rate cap protections.
More importantly, it remains to be seen how state regulators react to the OCC and FDIC Madden-fix rules. Will they focus on the true lender doctrine to enforce their state usury caps? Moreover, lawsuits such as Martha Fulford, Administrator, Uniform Commercial Credit Code v. Marlette Funding, LLC et al. ( in which the court ruled several days after the OCC final regulation was issued–a fact of which the court was apparently unware–that a non-bank assignee of loans made by a state bank cannot charge the same interest rate that the state bank itself could charge under FDIA Section 27(a)), as well as the cases filed by the Conference of State Bank Supervisors and the New York Department of Financial Services challenging the OCC’s proposed fintech charter, all indicate that states will litigate to protect their interests.
On the national front, an attempt to override both the FDIC and OCC final rules under the Congressional Review Act may be a possibility. Finally, with the Presidential election on the horizon, a new administration may result in changes to the regulatory leadership and their policy objectives.