By: Lauren Bomberger
In mid-November last year, the Federal Deposit Insurance Corporation (“FDIC”) and Office of the Comptroller of the Currency (“OCC”) announced a proposed rulemaking to address the Second Circuit’s ruling in Madden v. Midland Funding.[1] The proposed rules would permit nonbanks to take advantage of the “Valid When Made” doctrine when a partner state or national bank “sells, assigns, or otherwise transfers a loan” to them.[2] The proposals are notably beneficial for financial technology (“FinTech”) companies, who partner with state and national banks to make loans to their customers, particularly given that the viability of these business models were called into question following the 2015 Madden decision.[3] The FDIC and OCC received approximately 60 comments in response to the proposed rulemakings.[4] This blog post offers a brief summary of those responses, with a focus on the industry, states, and consumer advocacy groups.
The FDIC and OCC received comments from the industry, states, trade groups, consumer advocates, and legal scholars, among others.[5] The responses to the proposals have been predictably mixed, split between the states and consumer advocates on the one hand, and industry on the other.[6] The banking community, represented by the American Bankers Association (“ABA”) and Independent Community Bankers of America (“ICBA”), generally supported the proposals because they would provide much-needed clarification following Madden and reaffirm the primacy of federal preemption.[7] ABA expressed few concerns but asked that the OCC clarify that the “Valid When Made” doctrine applies to a loan when it is assigned to any entity, and not just another national bank.[8]
The Marketplace Lending Association (“MLA”) and Online Lenders Alliance (“OLA”), who represent a number of FinTech lenders, were cautiously optimistic.[9] They focused, for the most part, on the pushback that the OCC and FDIC will face, particularly regarding the agencies’ legal authority to promulgate such a rule.[10] OLA expressed concerns about the “chilling effect” the proposals could have on access to credit if the rulemakings create further uncertainty.[11] MLA proposed two technical suggestions to the OCC to address these concerns: (1) clarify that these rules would apply to the “sale, assignment, or other transfer of the loan or any interest in the loan”; and (2) provide that the “interest on a loan that is permissible . . . when the loan is made shall not be affected . . . .”[12] Financial Innovation Now (“FIN”) — an alliance of Big Tech industry players including Amazon, Apple, and Google — also expressed support for the FDIC and OCC proposals and emphasized the benefits to consumers and the market.[13]
The New York Department of Financial Services (“NYDFS”) and Conference of State Bank Supervisors (“CSBS”) had previously sued the OCC in the Southern District of New York and District of Columbia, respectively, over the OCC’s FinTech charter.[14] In response to the proposed Madden fix, NYDFS expressed opposition on the basis that extending the “Valid When Made” doctrine to nonbank partners would override state consumer protection laws and make it more difficult to combat predatory lending.[15] By contrast, CSBS agreed with industry trade groups that the proposals, as currently structured, could expose the agencies to litigation and create additional uncertainty.[16] However, CSBS identified other deficiencies in the current proposals and recommended that the OCC: (1) preserve state autonomy over consumer protection and the “true lender” doctrine (which is not explicitly addressed by the agencies); and (2) conduct an analysis pursuant to Section 25b of the National Bank Act.[17]
The Center for Responsible Lending — together with the National Consumer Law Center, Consumer Federation of America, Public Citizen, and others — vehemently opposed the proposals.[18] In a 54-page comment, the consumer advocacy groups discussed what they viewed as numerous issues with the Madden fix and urged the OCC and FDIC to withdraw their proposals.[19]
Outside of private and non-profit
stakeholders, Members of Congress have also spoken out. The House Financial Services Committee held
the first of a two-part hearing on February 5, 2020 entitled “Rent-A-Bank
Schemes and New Debt Traps: Assessing Efforts to Evade State Consumer
Protections and Interest Rate Caps.”[20] Some members of the committee expressed
concerns over so-called “Rent-a-Bank” schemes and were notably split along
party lines with regard to the FDIC and OCC proposals.[21] While the second part of the hearing was
originally scheduled for February 26, 2020, the hearing has since been
postponed and a new date has yet to be announced.[22] The comment periods have ended for both the
FDIC and OCC proposed rulemakings, and the responses thus far make clear that this
controversy will not go away any time soon, setting the stage for a potential
court battle if and when the rules are finalized.
[1] See Press Release, Federal Deposit Insurance Corporation, FDIC Proposes New Rule Clarifying Federal Interest Rate Authority (Nov. 19, 2019), https://www.fdic.gov/news/news/press/2019/pr19107.html (“Proposal to address marketplace uncertainty following 2015 court opinion”); see also Press Release, Office of the Comptroller of the Currency, OCC Proposes Rule to Clarify “Valid When Made” Doctrine (Nov. 18, 2019), https://www.occ.gov/news-issuances/news-releases/2019/nr-occ-2019-132.html (“The Office of the Comptroller of the Currency (OCC) is soliciting comments on a proposed rule to clarify that when a national bank or savings association sells, assigns, or otherwise transfers a loan, interest permissible prior to the transfer continues to be permissible following the transfer.”). See generally Madden v. Midland Funding, LLC, 786 F.2d 246 (2d Cir. 2015) (holding that a third-party debt buyer could not benefit from a partner bank’s preemption of state usury caps).
[2] FDIC Federal Interest Rate Authority, 84 Fed. Reg. 235 (proposed Dec. 6, 2019) (to be codified at 12 C.F.R. pt. 331); OCC Permissible Interest on Loans That Are Sold, Assigned, or Otherwise Transferred, 84 Fed. Reg. 225 (proposed Nov. 21, 2019) (to be codified at 12 C.F.R. pt. 7, pt. 160).
[3] See Antonio Reynolds, FDIC and OCC Propose Rules to Resolve Madden-ing Uncertainty Surrounding the Fintech-Bank Partnership Model, Wiley Rein: WileyConnect (Nov. 26, 2019), https://www.wileyconnect.com/home/2019/11/26/fdic-and-occ-propose-rules-to-resolve-madden-ing-uncertainty-surrounding-the-fintech-bank-partnership-model (noting that the FDIC and OCC’s proposed rules are a welcome development for fintech-bank partners).
[4] See generally FDIC Federal Interest Rate Authority, supra note 2 (FDIC proposed Madden fix rulemaking); see generally OCC Permissible Interest on Loans That Are Sold, Assigned, or Otherwise Transferred, supra note 2 (OCC proposed Madden fix rulemaking).
[5] See generally FDIC Federal Interest Rate Authority, supra note 2; see generally OCC Permissible Interest on Loans That Are Sold, Assigned, or Otherwise Transferred, supra note 2.
[6] See Philip Rosenstein, 21 States Urge OCC To Withdraw Proposed Madden Fix, Law360 (Jan. 22, 2020, 8:50 PM), https://www.law360.com/articles/1236552/21-states-urge-occ-to-withdraw-proposed-madden-fix (demonstrating state pushback to the FDIC and OCC’s proposed rules arguing it would enable predatory lenders to avoid state consumer protection laws).
[7] See American Bankers Association, Comment Letter on Notice of Proposed Rulemaking, Permissible Interest on Loans that Are Sold, Assigned, or Otherwise Transferred (Jan. 21, 2020), https://www.regulations.gov/document?D=OCC-2019-0027-0025; see also Independent Community Bankers of America, Comment Letter on Federal Interest Rate Authority; Permissible Interest on Loans That Are Sold, Assigned, or Otherwise Transferred (Jan. 30, 2020), https://www.regulations.gov/document?D=OCC-2019-0027-0064.
[8] See American Bankers Association, supra note 7.
[9] See Marketplace Lending Association, Comment Letter on Proposal Entitled “Permissible
Interest on Loans That Are Sold, Assigned, or Otherwise Transferred” 1 (Jan. 22, 2020), https://www.regulations.gov/document?D=OCC-2019-0027-0036; see also Online Lenders Alliance, Comment Letter on Office of the Comptroller of the Currency, Treasury: Notice of Proposed Rulemaking on “Permissible Interest on Loans that are Sold, Assigned or Otherwise Transferred” 1 (Jan. 21, 2020), https://www.regulations.gov/document?D=OCC-2019-0027-0054.
[10] See Marketplace Lending Association, supra note 9, at 5; see also Online Lenders Alliance, supra note 9.
[11] See Online Lenders Alliance, supra note 9 (“OLA is concerned that the current chilling effect caused by lawsuits and enforcement actions could essentially shut down the opportunity for federally regulated banks to leverage the expertise of fintech service providers.”).
[12] Marketplace Lending Association, supra note 9, at 12.
[13] See Financial Innovation Now, Comment Letter on Permissible Interest on Loans that are Sold, Assigned, or Otherwise Transferred 1 (Jan. 21, 2020), https://www.regulations.gov/document?D=OCC-2019-0027-0051.
[14] See Philip Rosenstein, Fintech Litigation To Watch In 2020, Law360 (Jan. 1, 2020, 12:04 PM), https://www.law360.com/articles/1230397/fintech-litigation-to-watch-in-2020 (discussing the history of litigation over the OCC’s FinTech charter, which is currently pending in the Second Circuit while the D.C. case has been dismissed).
[15] See New York Department of Financial Services, Comment Letter on Permissible Interest on Loans That Are Sold, Assigned, or Otherwise Transferred 1, 3, 4 (Jan. 21, 2020), https://www.regulations.gov/document?D=OCC-2019-0027-0033.
[16] See Conference of State Bank Supervisors, Comment Letter on Permissible Interest on Loans That Are Sold, Assigned, or Otherwise Transferred 10 (Jan. 21, 2020), https://www.regulations.gov/document?D=OCC-2019-0027-0032 (“The proposals failure to comply with section 25b requirements as well as the dearth of persuasiveness, consistency and thoroughness in its reasoning will ultimately only undermine the intended policy objective of the proposed rule, namely, to provide certainty to national banks regarding the enforceability of the interest term in their loans after assignment to a nonbank. This certainty cannot be provided if the proposal is mired in litigation for many years with the result being that the OCC must reissue a proposed rule that complies with section 25b.”).
[17] See id. at 1.
[18] See Center for Responsible Lending et al., Comment Letter on OCC Notice of Proposed Rulemaking, Permissible Interest on Loans That Are Sold, Assigned, or Otherwise Transferred 1–2 (Jan. 21, 2020), https://www.regulations.gov/document?D=OCC-2019-0027-0047.
[19] See id. at 54.
[20] Rent-A-Bank Schemes and New Debt Traps: Assessing Efforts to Evade State Consumer Protections and Interest Rate Caps: Hearing Before the H. Comm. on Fin. Servs., 116th Cong. (2020).
[21] See Philip Rosenstein, Partisan Divide Dominates Bank-Nonbank Partnership Hearing, Law360 (Feb. 5, 2020, 9:22 PM), https://www.law360.com/articles/1240238/partisan-divide-dominates-bank-nonbank-partnership-hearing.
[22] Press Release, U.S. H. Comm. on Fin. Servs., Chairwoman Waters Announces Additional Updates to February Committee Schedule (Feb. 18, 2020), https://financialservices.house.gov/news/documentsingle.aspx?DocumentID=406254.
