It did not take long for the Office of the Comptroller of the Currency's ("OCC") May 29 Final Rule codifying the valid-when-made principal to face challenges in court. On July 29, the attorneys general for New York, California and Illinois filed suit in the Northern District of California to block the rule, which extended the National Bank Act's ("NBA") preemption of state usury laws to any assignee or transferee of a loan originated by a national bank. The OCC issued the rule to reinforce the long-standing doctrine that the terms of a loan as originated by a bank remain valid even after that loan is sold or transferred to a non-bank entity ("Valid-When-Made" doctrine), after that principle was called into question by the Second Circuit's decision in Madden v. Midland Funding LLC, 786 F.3d 246 (2d Cir. 2015). The OCC's codification of the Valid-When-Made doctrine was an attempt to create legal certainty in the lending industry and has the potential to increase access by permitting non-banks, including fintechs, to acquire loans without worrying that the loan terms will be subject to more restrictive state usury laws.
In their complaint for declaratory and injunctive relief, New York, California and Illinois describe the OCC's rule as "federal overreach," arguing that it is "arbitrary and capricious" and beyond the OCC's powers. They further argue that the rule will foster predatory lending by permitting non-banks to partner with national banks to avoid state interest rate caps. More specifically, the states argue that the OCC's oversight is limited to national banks, and thus it does not have authority to extend federal preemption to other entities. They argue that the OCC's Final Rule does not meet the preemption standard set forth in the Dodd-Frank Act - that only state laws that "prevent or significantly interfere with the exercise by a national bank of its powers" are preempted - because the OCC failed to undertake the required evidence-based, case-by-case analysis in making its preemption determination. 12 U.S.C. § 25b(b)(1)(B). New York, California and Illinois claim that the OCC's Final Rule harms both the states' fiscal interests and their quasi-sovereign interests in protecting consumers and promoting fair lending marketplaces. In light of these arguments, New York, California and Illinois ask the court to find that the OCC's promulgation of the rule violated the Administrative Procedure Act, and ask the court to set aside the OCC's Final Rule.
By all appearances, the OCC intends to vigorously fight the suit. The acting head of the OCC, Brian Brooks, has argued that there is no merit to the criticisms of the rule as facilitating predatory lending. He defended the Final Rule, explaining that it creates certainty for banks and makes "more credit available to people."
The case will proceed before District Judge Jacqueline Scott Corley, as the State of California declined to proceed before the Magistrate. Look-out for developments on this case as it proceeds.
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