OCC beats GA challenge to “Valid When Made” rule

On February 8, a judge in the Northern District of California ruled on counterclaims for summary judgment filed by the states of California, Illinois and New York (plaintiffs) and the Office of the Comptroller of the Currency and Michael Hsu in his capacity as interim controller. of the currency (collectively, the OCC) on the validity of the rule “valid at the time of creation”.

In 2020, the OCC and the Federal Deposit Insurance Corporation (FDIC) created parallel rules valid when established, providing that a bank can transfer its loan to a third party without the risk of lower interest rate caps in under the state law applying to the loan after the transfer. In this situation, the bank issues the loan in question but then transfers the loan to the third party. This third party will continue to charge the bank’s interest rate, even if that rate exceeds an interest rate cap in the state where the third party is located.

The valid rules when established deal with the uncertainty of the decision of the second circuit in Madden vs. Midland Funding, LLC on the interest rate cap that applies after a bank sells or transfers a loan. crazy concluded that where the originating bank retains no interest or control over the debt, state usury laws would apply to the third party. As such, the rules were enacted to clarify that the interest rate on a loan will not be affected by the subsequent sale or transfer of a loan by a bank.

The plaintiffs argued that the OCC violated the Administrative Procedures Act when it made the rule. The court found that the OCC did not exceed its statutory authority in creating the validity-once-made rule and that it did not violate the procedural statutory requirements of the National Bank Act. The court also determined that the rule valid when established can be maintained despite the decision rendered in crazy. Finally, the court concluded that the rule is not unreasonable or arbitrary and capricious under Chevron To analyse.

Our catch. The valid rule when established has been a contested topic and will likely continue to be one. Consumer rights groups argue the rule circumvents state usury laws and allows predatory lending, while banks and banking regulators have said that crazy created regulatory uncertainty, and after an informed and reasoned decision, federal regulators enacted the rules to eliminate that uncertainty. The rules were signed into law by the Trump-appointed regulators who have since left, and there is a risk that Biden-appointed regulators will try to change the industry-favored rules.

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