Court Rules in Favor of OCC in ‘Valid When Made’ Suit

A District Court judge in California has sided with the Office of the Comptroller of the Currency, a federal regulator of banks, after it was sued by three states — California, Illinois, and New York — for allegedly overstepping its authority when it issued a rule ensuring the terms of a loan remain valid after the loan has been sold to a non-bank entity, a key component when buying and selling debt portfolios.

A copy of the ruling in the case of The People of the State of California et al. v. The Office of the Comptroller of the Currency et al. can be accessed by clicking here.

“Today, the district court affirmed the validity of the OCC’s rule, which provides that when a national bank or state or federal savings association sells, assigns, or otherwise transfers a loan, the interest permissible before the transfer continues to be permissible after the transfer,” said Michael J. Hsu, the acting Comptroller of the Currency, in a statement. “This legal certainty should be used to the benefit of consumers and not be abused. I want to reiterate that predatory lending has no place in the federal banking system. The OCC is committed to strong supervision that expands financial inclusion and ensures banks are not used as a vehicle for ‘rent-a-charter’ arrangements.”

Known as the “valid when made” rule, it was announced by the OCC in June 2020 to close a loophole that was created after a ruling from the Second Circuit Court of Appeals in Madden v. Midland Funding. That ruling determined that a debt buyer should not be privy to the same pre-emption from state usury laws as the financial institution that originated the loan. In the case, Midland attempted to continue to charge the same interest rate on a credit card that was originally originated by Bank of America. The interest rate on the loan exceeded the amount allowed by New York state law, but BofA was pre-empted from following that law under the National Bank Act. Midland appealed the ruling to the Supreme Court, which declined to hear arguments in the case.

To close the loophole, the OCC and the Federal Deposit Insurance Corp. issued rules codifying that the terms of the loan remained valid even if the loans were sold to a non-federally chartered financial institution.

The AGs filed suit, alleging the OCC does not have jurisdiction over non-federally chartered banks and can not make rules for companies it does not regulate. And, the OCC should have worked with the Consumer Financial Protection Bureau before issuing a rule that preempted state laws.

Judge Jeffrey S. White of the District Court for the Northern District of California rejected all of the plaintiffs’ arguments why it should be entitled to summary judgment.

“Plaintiffs also argue the OCC failed to consider that the Final Rule creates a regulatory vacuum because it will permit non-banks to ‘ignore’ state rate caps,” Judge White wrote. “Again, the Court does not find Plaintiffs’ argument on that point persuasive. Accordingly, the Court concludes that the record does not demonstrate that the OCC ‘entirely failed to consider’ an important aspect of the problem.”

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