Court upholds ‘good when made’ rules, but ‘true lender’ risk remains | Hudson Cook, LLP
In a victory for fintechs and the banks that partner with them, the U.S. District Court for the Northern District of California recently dismissed two challenges from a consortium of state attorneys general to regulations “valid when made” issued in 2020 by the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC). Under the “valid when contracted” rules and doctrine, the interest rate on a bank loan remains valid and enforceable even after the bank has sold or transferred it to a party who could not have take out the loan on the same terms as the bank.
In their challenges, the states, which included California, Illinois and New York in the lawsuit against the OCC, and California, Illinois, Minnesota, New Jersey, New York, North Carolina, Massachusetts and the District of Columbia in the lawsuit against the FDIC, argued that both agencies violated the Administrative Procedure Act by issuing the rules which they claimed (1) exceeded their authority, (2) were arbitrary and capricious and (3) violated other federal regulatory standards. The court ruled that the OCC and FDIC acted within their authority and that their actions were a reasonable (and therefore permissible) interpretation of their licensing laws.
The judgments confirming the settlement materialize the repudiation of the decision by Madden vs. Midland Funding, LLC, 786 F.3d 246 (2nd Cir. 2015). In crazy, the United States Court of Appeals for the Second Circuit – which includes Connecticut, New York and Vermont – ruled that non-domestic banking entities that purchase loans issued by domestic banks cannot rely on the National Bank Act to protect them from usury claims under state law. the crazy ruling contradicts decades of case law that determines whether a loan is usurious by looking at the authority of the lender who originated the loan. If a loan originally met usurious limits, it cannot become usurious simply because another party purchased the loan. the crazy decision introduced enormous uncertainty to the national credit market that the OCC and FDIC rules were intended to correct.
While the rulings are welcomed by those in the banking partnership credit market, they are not the final word on banking partnerships. Shortly after the rulings, Acting Comptroller of the Currency Michael J. Hsu issued a statement both praising the “legal certainty” but also warning that such clarity should be “used for the benefit of consumers” and not “like a vehicle for hire”. -charter arrangements”.
The rulings are likely to have a significant deterrent effect against consumer lawsuits alleging a crazy claim that challenges interest rates on loans made by banks as violating state usury laws. The rules, now upheld by a federal court, provide that the interest rate on transferred loans is not subject to attack under state usury laws if the interest rate was permitted at the time of origin. The rulings, however, will not deter other theories challenging banking partnerships, including the allegation that the bank in such partnerships is not the “true lender”. One of the challengers to the rules, the District of Columbia, has previously sued fintechs that partnered with banks to offer loans above the district’s usury cap, saying the fintechs, not the bank, were the real lender.
While it’s unclear whether states will appeal the rulings (they have until March 10 to do so), the United States Court of Appeals for the Ninth Circuit has already suggested in another case – McShannock vs. JP Morgan Chase Bank NA976 F.3d 881, 892 (9th Cir. 2020) – that crazy was erroneously decided, and noted that the lenders as a result of crazy issued more and more loans.