On Tuesday, February 8, 2022, the United States District Court for the Northern District of California issued two separate orders that upheld the OCC’s and FDIC’s “valid-when-made” rules.

In 2020, the OCC and FDIC issued separate rules addressing, among other things, uncertainty in secondary markets following the decision of Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015) which established that usury claims against non-bank assignees were not preempted by the National Banking Act of 1864 (NBA). The OCC promulgated a rule entitled “Permissible Interest on Loans That Are Sold, Assigned, or Otherwise Transferred” which is codified under 12 CFR § 160.110(d) and provided that permissible interest on loans originated by savings associations is not affected by the sale, assignment, or other transfer of the loan. Additionally, the FDIC promulgated its own “valid when made” rule entitled “Interest Rate Authority” under 12 CFR § 331.4(e) that clarified that the interest rate lawfully assessed by an originating depository institution is not impacted by the sale, assignment, or other transfer of the loan or a change in state law.

As expected, a small number of states mounted a legal challenge related to policy concerns with these rules which, they argued, may enable “rent-a-charter” schemes that seek to evade state usury limits.

In a major victory for the OCC and FDIC, United States District Court Judge Joseph White issued two separate orders which granted summary judgment in favor of the agencies in lawsuits brought by the states.

In both cases, the Plaintiff states alleged that the agencies violated the Administrative Procedures Act when they promulgated their respective rules.

In its order granting the FDIC’s cross-motion for summary judgment, the Court found that the FDIC did not exceed its statutory authority when it promulgated 12 CFR § 331.4(e). The Court turned to a Chevron analysis and concluded that the FDIC’s rule was not unreasonable or arbitrary and capricious and that the rule is consistent with the principle that “the assignee steps into the shoes of the assignor.”

Likewise, in its order granting the OCC’s cross-motion for summary judgment, while acknowledging the “true lender” rule also promulgated by the OCC in 2020 had been invalidated by Congress pursuant to the Congressional Review Act, the Court did not consider that outcome relevant to the valid-when-made rule. The Court also found that the OCC did not exceed its statutory authority when it promulgated 12 CFR § 160.110(d) addressing permissible interest on loans that are sold, assigned, or transferred. The Court found that the OCC did not violate procedural statutory requirements set forth in the NBA when promulgating the rule and also found that the rule did not run afoul of the 2nd Circuit’s prior ruling in Madden v. Midland Funding, LLC in 2015, because the procedural claims presented before the Court were separate and distinct from what the 2nd Circuit was presented within Madden. The Court then turned to a Chevron analysis and concluded the OCC’s rule was not unreasonable or arbitrary and capricious and cited the OCC’s reasoning that the rule was intended to resolve uncertainty following the Madden decision.

While we anticipate appeals are forthcoming, these decisions reinforce the legitimate nature of loans validly originated by depository institutions and remove unnecessary uncertainty regarding whether those loans remain enforceable after they are sold by the originating depository institution.