Fintech in Brief: State Attorneys General File Lawsuit Challenging OCC’s ‘Valid When Made’ Rule

Nutter McClennen & Fish LLP

On July 29, 2020, the state attorneys general for California, Illinois, and New York filed a complaint against the Office of the Comptroller of the Currency (“OCC”) challenging the OCC’s final “valid when made” rule (the “OCC Rule”), seeking declaratory and injunctive relief. The states filed suit in federal court in the Northern District of California.

The challenged OCC Rule, which was published on June 2 and takes effect on August 3, seeks to clarify the usury status of loans originated or funded by national banks and federal thrifts that are subsequently assigned or held by nonbanks under the interest rate exportation provisions of Section 85 of the National Bank Act (“NBA”) and comparable provisions of the Home Owners Loan Act. See Nutter Legal Advisory from June 2. The Federal Deposit Insurance Corporation (“FDIC”) also adopted a comparable rule on July 22, but is notably not named as a defendant in the complaint. 

As Nutter previously noted, the three states previewed their challenge in comments filed during the OCC Rule’s notice-and-comment period, where they argued the proposed OCC Rule would undermine state usury laws that prevent loansharking, abusive payday, and other types of predatory short-term and high-interest lending. The complaint alleges that the OCC Rule exceeds the OCC’s authority under the NBA and could facilitate predatory lending through what it characterizes as “sham” and “rent-a-bank” partnerships designed to evade state usury law. The complaint also alleges that the OCC failed to follow the preemption procedures set forth in Title X of the Dodd-Frank Act, ignored the potential for regulatory evasion, and failed to provide evidence supporting the OCC Rule. Also, it alleges that the OCC Rule’s explicit purpose is to impermissibly overturn the Second Circuit’s holding in Madden v. Midland Funding, LLC  that Section 85’s interest-rate exemption applies only to national banks and not subsequent nonbank acquirors.

The OCC is expected to vigorously defend its Rule and will likely move to dismiss the complaint based on contract and federal pre-emption principles. The preamble to the OCC Rule addressed many of the state attorneys’ general criticisms, including highlighting the OCC’s active supervision and examination of national banks and federal thrifts and their third party relationships.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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