On Brian Brooks’ first day as Acting Comptroller of the Currency, the OCC issued a final rule intended to resolve the legal uncertainty created by the Second Circuit’s decision in Madden v. Midland Funding. In that decision, the Second Circuit held that a nonbank that purchased charged-off loans from a national bank could not charge the same rate of interest on the loan that Section 85 of the National Bank Act (NBA) allowed the national bank to charge.
The final rule adopts the language in the OCC’s proposal codifying its interpretation of Section 85 and 12 U.S.C. §1463(g) (a provision of the Home Owners’ Loan Act) that the assignee of a loan made by a national bank or federal savings association can charge the same interest rate that the bank or savings association is authorized to charge under federal law. The final rule amends 12 CFR part 7 and part 160 to add, respectively, Section 7.4001(e) and Section 160.110(d), which provide:
Interest on a loan that is permissible under [12 U.S.C. 85] [12 U.S.C 1463(g)(1)] shall not be affected by the sale, assignment, or other transfer of the loan.
In its analysis accompanying the final rule, the OCC observed that, while Section 85 clearly establishes a national bank’s authority to make and transfer loans, it does not expressly address how the exercise of that authority affects the interest term. It concluded that “it is appropriate to resolve the silence in section 85 by providing that when a bank transfers a loan, interest permissible before the transfer continues to be permissible after the transfer.” While the OCC cited “valid-when-made” and “steps into the shoes” principles in its analysis, it noted that it did not do so “as independent authority for this rulemaking but rather as tenets of common law that inform its reasonable interpretation of section 85.” It also observed that its interpretation is consistent with the purpose of section 85 by facilitating national banks’ ability to operate lending programs on a nationwide basis and also promotes safe and sound operations by supporting national banks’ ability to use loan transfers as a source of liquidity. (The OCC commented that the legal uncertainty created by Madden impairs the ability of many national banks to rely on loan transfers as a risk management tool “which is particularly worrisome in times of economic stress when funding and liquidity challenges may be acute.”)
The OCC indicated that its national bank discussion “applies equally to savings associations” because, in 12 U.S.C. §1463(g), “Congress provided savings associations with authority similar to section 85 to charge interest as permitted by the laws of the state in which the savings association is located.” The OCC observed that Congress modeled section 1463(g) on section 85 to place savings associations “on equal footing with their national bank competitors, and thus, these provisions are interpreted in pari materia.” For these reasons, the OCC concluded “that section 1463(g) should be interpreted coextensively with section 85” and that, “as a matter of Federal law, [national banks and savings associations] may transfer their loans without impacting the permissibility or enforceability of the interest term.”
In addition to rejecting the position of some commenters that the Administrative Procedure Act applies to the rulemaking, the OCC rejected the view expressed by some commenters that its proposal would facilitate predatory lending by promoting “rent-a-charter relationships.” The OCC noted that it “has consistently opposed predatory lending, including through relationships between banks and third parties.” While observing that “[n]othing in this rulemaking in any way alters the OCC’s strong position on this issue,” the OCC also stated that it “understands that appropriate third-party relationships play an important role in banks’ operations and the economy.”
Consistent with its proposal, the OCC’s final rule does not address “which entity is the true lender.” The OCC stated that because the final rule “only applies to bank loans that are permissible under section 85 or 1463(g),” it did not find it necessary, as requested by a commenter, to include a proviso in the rule indicating that it only applies when the bank is the true lender as determined by the law of the state where the borrower resides. The OCC also noted that establishment of a test for determining when the bank is the true lender would raise issues “distinct from, and outside the scope of, this rulemaking when a bank makes a loan and assigns it to a third party” and that “[t]he true lender issue, which has been considered by courts recently, is outside the scope of this narrow tailored rulemaking.”
In November 2019, during the same week as the OCC issued its proposal, the FDIC issued a proposal intended to address the uncertainty created by Madden for loans originated and sold by state banks. The FDIC has not yet acted on its proposal. The FDIC’s proposal interprets Section 27(a) of the Federal Deposit Insurance Act, 12 U.S.C. §1831d(a), which allows an FDIC-insured state bank to export to out-of-state borrowers the interest rate permitted by the state in which the state bank is located to its most favored lender, regardless of any contrary laws of such borrowers’ states. While rejecting calls from commenters for the OCC to coordinate with the FDIC and harmonize their rules, the OCC noted that “it intends that its rule will function in the same way as the FDIC’s proposed regulatory text would, which is consistent with interpreting sections 85 and 1831d in pari materia.”
