US States Seek To Invalidate OCC True Lender Rule | Orrick, Herrington & Sutcliffe LLP
- Complaint filed in New York State Folks, et al. v. Office of the Comptroller of the Currency, et al., n ° 1: 21-Civ-00057 (SDNY January 5, 2021)
Recently, seven states (New York, California, Colorado, Massachusetts, New Jersey, Minnesota and North Carolina) and the District of Columbia filed a complaint in the Southern District of New York against the Office of the Comptroller of the Currency (“OCC And Brian P. Brooks, Acting Currency Controller. Plaintiffs ask court to overturn recently promulgated OCC ruling to reign clarify the identity of the so-called true lender of a loan (True Lender Rule). The fate of this rule, as well as to reign face the fallout from Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015) —may have important implications for partnerships between banks and nonbank lending platforms.
The True Lender Rule specifies that a national bank is the “lender” when it issues a loan in partnership with a non-bank third party if, at the date of creation, the bank is designated as a lender in the loan agreement or if it finances a loan. By establishing these clear rules, the OCC aimed to dispel the uncertainty as to when the bank in such partnerships is considered the “real lender” and, therefore, when the federal pre-emption of usury laws. States applies to the loan.
Having failed to persuade the OCC to adopt its political preferences in framing its rules (see Attorney General of the State of New York, et al., True Lender Rule Comment Letter (September 3, 2020)), the plaintiffs are now seeking to overturn the real lender rule under the Administrative Procedure Act (APA).
When nationally chartered banks grant loans, they are only subject to the usury limits of the bank’s home state. Federal law expressly authorizes these banks to charge interest rates permitted in the bank’s home state to borrowers from other states, regardless of usury limits that otherwise apply to loans in the bank. ‘State of origin of the borrower. When banks partnered with non-bank third parties, some borrowers and others argued that the bank was not the real lender and therefore federal preemption should not apply. Courts reviewing these claims have applied divergent tests resulting in inconsistent decisions as to which entity should be considered to be making the loan, that is, who is the “real lender” from the perspective of the lender. ‘wear. Such uncertainty can discourage lending through bank-platform partnerships and undermine access to credit. The OCC promulgated its True Lender Rule to avoid such confusion and to reiterate its commitment to tightly regulate domestic banks identified as lenders.
During the rule’s notice and comment period, commentators referred to the OCC’s long-standing policy prohibiting banks from entering into “charter rental programs,” where an agency not bank is authorized to operate a bank’s charter to issue loans over the usury limit period. The OCC explained that the Rule “did not reverse the position of the OCC”. He explained that “the OCC’s long-standing and unwavering opposition to predatory lending, including, but not limited to, predatory lending in a relationship with a third party remains intact and strong.” and that the rule “would solve charter rental problems.” and ensure that banks do not participate in these arrangements. Acting Controller Brooks explained in written testimony to the US House of Representatives Financial Services Committee: “[i]In addition to defining the “true lender,” the rule specifies that if a bank is the “true lender” of a loan, it is ultimately responsible for any applicable compliance obligations associated with the origin of that loan. Thus, the rule denies the possibility for banks to create and evade responsibility for these loans. This will result in the elimination of the greatest risk associated with the improper rental of a charter. Hearing on the oversight of prudential regulators: ensuring the safety, soundness, diversity and accountability of deposit-taking institutions during the pandemic Before the US Commission. on End. Services, 116 Cong. (November 12, 2020) (Statement by Brian P. Brooks, Acting Controller of the Currency).
The SDNY complaint
On January 5, 2021, the applicants filed a civil action seeking to invalidate the OCC True Lender Rule for several reasons.
First, the complaint alleges that the rule is beyond the scope of the OCC’s authority. The OCC is authorized to promulgate rules to clarify an ambiguity or loophole in the laws it administers. The agency said that by issuing the True Lender Rule, it clarified three laws on lending: the National Bank Act, 12 USC § 24; the Federal Reserve Act, 12 USC § 371; and the Home Owners’ Loan Act, 12 USC § 1463. The complaint argues that these laws do not address the real problems of lenders and therefore contain no relevant ambiguity and do not authorize the true lender rule.
Second, the complaint alleges that while these laws could be interpreted to address the problems of true lenders, the true lenders rule would constitute a substantially unreasonable interpretation. The plaintiffs characterize the OCC’s strict standard as deviating from the “centuries” of usury law and turning a blind eye to the economic realities of transactions. They further claim that the rule opens the door to unregulated and predatory lending under the auspices of federal law.
Third, the complaint accuses the OCC of failing to comply with the procedural and substantive requirements of the Dodd-Frank Act to take precedence over state usury laws. Among other things, the complainants allege that the agency failed to consult the Consumer Financial Protection Bureau, analyze preemption on a case-by-case basis, or base its decision on “substantial evidence.”
Fourth, although in enacting the rule the OCC made it clear that it remained strongly opposed to charter rental programs and would be better able to prevent them under the new rule, the complaint argues that the OCC should be deemed to have reversed its long-standing policy of opposing “bank rental schemes” without a reasoned explanation.
On these grounds, the complaint claims that the true lender rule is an “arbitrary” and “capricious” rule which exceeds the “legal competence” of the OCC and was promulgated “without respecting the procedure required by law”, in violation of administrative procedures. Act.
The lawsuit echoes a similar action in the Northern District of California challenging on almost identical grounds the Madden To reign. See Complaint for declaratory and injunctive relief, The people of the state of California ex rel. Becerra, et al. v. Office of the Comptroller of the Currency, et al. (ND Cal. 29 Jul 2020). The counterclaims of the parties for summary judgment can be found here. The California District Court will hold a hearing on these cross-petitions on March 19, 2021.
Will the True Lender Rule survive these challenges?
While a full merits analysis is not possible at this early stage, there are several considerations that support the continued viability of the True Lender Rule. Congress has granted the OCC extensive regulatory power over federally chartered banks, including the power to preemptively regulate state financial laws on consumers that significantly interfere with the powers of national banks. The question of when a loan issued by a national bank should be considered inappropriate – so that the national bank which issued the loan should not be regarded as the true lender – is by nature a question requiring a uniform federal rule, as opposed to conflicting rules from each of the 50 states and DCs The need for such uniformity was amply supported by the evidence gathered by the OCC during the rule-making process. 85 Fed. Reg. 68744, n.14.
The real question of the lender also inherently involves the question of when the national bank is acting inappropriately in issuing such a loan. Courts appear likely to recognize the role and need for the federal regulator to address and regulate these matters.
In addition, OCC regulations should be entitled to a certain degree of deference. Complainants correctly note that the Dodd-Frank Act subjects OCC regulations to Skidmore respect. See 12 USC § 25b (b) (5) (A). But at the same time Skidmore deference is less robust than Chevron deference, it is nonetheless a “highly respectful standard of judicial review”. K. Hickman & M. Krueger, In search of the modern Skidmore Standard, 107 Col. L. Rev. 1235, 1259 (2007) (discussing the empirical analysis of five years post-United States v Mead Corp., 533 US case law 218 (2010)).
Of course, the continued vitality of the True Lender Rule could also depend on the political direction mapped out by the new Biden administration. Although both the Obama and Trump administrations have supported the risk management principles that underpin the True Lender and Madden Rules, the new administration may take a different approach.