United States:
OCC Prevails In Challenge To “Valid When Made” Rule
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On February 8, the U.S. District Court for the Northern District
of California ruled against three states – California, Illinois,
and New York – challenging the OCC’s rule on the “valid
when made” doctrine. In 2020, the OCC issued a final rule codifying the
“valid when made” principle by clarifying that the
determination of whether interest on a loan is permissible is
determined when the loan is made and that a bank’s transfer of
a loan to a third party does not impact the validity or
enforceability of that interest.
In their complaint challenging the OCC
Final Rule, the states contended that the issuance of the rule
violated the Administrative Procedures Act in that the OCC rule is
(i) arbitrary and capricious, (ii) in excess of its statutory
authority, and (iii) an agency action taken without observance of
procedure required by law. In supporting these argument, the states
claimed, among other things, that the OCC failed to meaningfully
consider the rule’s inevitable facilitation of predatory
“rent-a-bank” schemes by permitting lenders to evade
state law by partnering with national banks.
In its order, the court rejected the
states’ argument that the rule creates a regulatory vacuum that
will permit non-banks to ignore state rate caps. “The court
concludes that the record does not demonstrate that the OCC
‘entirely failed to consider’ an important aspect of the
problem.” The court went on to state that “the OCC made
an informed and reasoned decision” and that “these are
matters within the OCC’s discretion and expertise, the court
should defer to the OCC’s judgments and uphold the final
rule.”
Michael Hsu, the Acting Comptroller of the OCC, issued a
statement the next day stating that while the court’s ruling
affirmed the validity of the OCC’s rule, this legal certainty
should be used to the benefit of consumers and not be abused.
“The OCC is committed to strong supervision that expands
financial inclusion and ensures banks are not used as a vehicle for
‘rent-a-charter’ arrangements.”
Putting in Into Practice: Resolving this
lawsuit helps to relieve uncertainty in the primary and secondary
markets for consumer and commercial credit, and in particular, for
the secondary market for loans originated by national banks.
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