Lenders that should enjoy preemption powers now face the prospect of more restrictive state-imposed interest rate limits thanks to the recent court decision in Madden v. Midland Funding. The Office of the Comptroller of the Currency has the ability to throw financial institutions a lifeline to make up for the ruling, but only if the agency chooses to do so.
In Madden v. Midland Funding, the Second Circuit Court of Appeals held that the purchaser of charged-off debt from a national bank does not inherit the interest-rate authority of the national bank under the National Bank Act. Accordingly, the debt buyer could be subject to the usury limitations provided by the borrowers' state law.
The OCC had submitted an amicus brief in the Supreme Court opposing the ruling, asserting that the authority conferred on national banks by the NBA extends to a loan buyer when the credit is sold, and the buyer can continue to charge the same interest rate.
But the OCC’s position is baffling since the agency to date has been unwilling to provide companies with a regulatory solution to get around the court decision.
Earlier this month, during a Q&A session at the LendIt USA conference, I asked Comptroller Thomas Curry whether the OCC would issue an interpretive opinion on the interest rate preemption issue in Madden. In response to my question, Curry said that the OCC would not issue an interpretive opinion, since doing so would create a “battle with the courts” and the OCC cannot overrule the Second Circuit.
I strongly disagree with Curry’s rationale for declining to issue an interpretive opinion. Indeed, I believe the OCC should go further and propose a rule consistent with the views it expressed in its amicus brief.
Section 85 of the NBA allows a national bank to charge interest at the maximum rate permitted by its home state, including to customers residing in states with usury limits that would prohibit charging such interest. In its amicus brief, the OCC asserted that national bank and loan buyer’s interest rate authority arises from the “valid-when-made” rule. That rule provides that if the interest rate on a bank's original loan agreement is not usurious, the loan does not become usurious when the loan is sold.
In Madden, the OCC took the position that the plaintiff's usury claim was preempted by Section 85 because it would impair the national bank's right under federal law to originate and transfer loans at the rate permitted by the NBA.
Curry's suggestion that it would be improper for the OCC to issue an interpretive opinion because it would place the OCC in conflict with the courts is inconsistent with both OCC and U.S. Supreme Court precedent. In the 1990s, dozens of class action lawsuits were brought against banks that charged credit card late fees and other fees as a form of “interest” under Section 85, alleging that the fees were not allowed by the borrowers' home state laws.
Despite the pendency of these lawsuits at the time (or because of these lawsuits), the OCC's then-chief counsel issued an interpretive letter concluding that the fees were in fact “interest” under Section 85 and were permissible because they were allowed by the laws of the banks' home states. The OCC's letter reflected the position it was then taking in amicus briefs filed in federal and state courts.
Additionally, while the issue was pending before the Supreme Court in Smiley v. Citibank, the OCC adopted a regulation which defined the term “interest” under Section 85 to specifically include late fees and a number of other charges. The plaintiff argued that this eleventh-hour action, on the eve of a Supreme Court decision, was improper. The Supreme Court flatly rejected this argument and relied heavily on the new regulation in deciding the case in favor of the industry. The Court stated: “That it was litigation which disclosed the need for the regulation is irrelevant.”
The Madden opinion has created great uncertainty with respect to a wide variety of lending programs, including “bank model” marketplace lending, where national banks originate loans and then transfer them to nonbank third parties. The OCC’s proposal to create a fintech charter would, if finalized, help some companies avoid the negative impact of Madden. However, this initiative does not eliminate the need for an OCC rule.
First, the prospects for creation of a fintech charter are highly uncertain. The OCC's proposal has been criticized by state regulators, consumer groups and others, and Republican lawmakers have warned that they will seek to overturn the OCC's actions if it proceeds in haste. Also, since Curry's term expires in April, the views of his successor on the charter are likely to play a major role in determining the proposal's future.
Second, even if the fintech national bank charter is eventually created, many fintech companies will choose not to get national bank charters or will be unable to do so.
Finally, a fintech national bank charter would allow the fintech bank to charge the interest permitted by Section 85 but Madden would still place at risk the authority of a company that purchases loans from such a bank.
Madden is adversely affecting lending markets and the OCC has previously asserted that the decision is incorrect.
The OCC should follow its precedent (and the Supreme Court's vindication of its action) in Smiley. The agency should not be deterred by the fact that the courts are weighing in on the issue. By using its rulemaking power, the OCC can most quickly and effectively eliminate the risks created by Madden for debt sales by national banks and federal savings associations. This would include "bank model" and other lending programs that rely on the originating bank's preemptive authority under federal law to charge interest rates and fees allowed by its home state, even if greater than those permitted under borrowers’ state law.