The Attorneys General of California, New York, and Illinois yesterday filed a lawsuit against the Office of the Comptroller of the Currency, seeking to block the implementation of a new rule that ensures the terms of a loan remain valid after the loan has been sold to a non-bank entity, a key component when buying and selling debt portfolios.
Known as the “valid when made” rule, it was announced by the OCC in early June to close a loophole that was created after a ruling from the Second Circuit Court of Appeals in Madden v. Midland Funding. That ruling determined that a debt buyer should not be privy to the same pre-emption from state usury laws as the financial institution that originated the loan. In the case, Midland attempted to continue to charge the same interest rate on a credit card that was originally originated by Bank of America. The interest rate on the loan exceeded the amount allowed by New York state law, but BofA was pre-empted from following that law under the National Bank Act. Midland appealed the ruling to the Supreme Court, which declined to hear arguments in the case.
To close the loophole, the OCC and the Federal Deposit Insurance Corp. issued rules codifying that the terms of the loan remained valid even if the loans were sold to a non-federally chartered financial institution.
Arguing that the OCC is over-reaching and that the rule exempts “predatory lenders” from being forced to adhere to state interest rate caps and usury laws, the three AGs filed suit in a California District Court. A copy of the complaint can be accessed by clicking here.
The OCC does not have jurisdiction over non-federally chartered banks and can not make rules for them, the AGs argue in the complaint. As well, according to the AGs, the OCC should have consulted with the Consumer Financial Protection Bureau before issuing a rule that pre-empts state consumer protection laws.
“As our state and nation continue to suffer the devastating effects of COVID-19, with millions of Americans still unemployed and struggling to make ends meet, it is reprehensible that the Trump Administration has chosen to protect big banks’ profits rather than vulnerable consumers’ wallets,” said Letitia James, the Attorney General of New York, in a statement. “All this rule does is make it easier for bad actors to charge New Yorkers triple-digit interest rates on loans and chart a path to more easily take advantage of consumers, which is why we are taking action.”
