Less than a month after suing one federal regulator, a group of state attorneys general filed suit yesterday against another one, seeking to block the implementation of a rule aimed at ensuring 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.
Yesterday, the attorneys general of California, Illinois, New York, New Jersey, Minnesota, Massachusetts, North Carolina, and Washington, D.C., sued the Federal Deposit Insurance Corp., which provides deposit insurance to financial institutions nationwide, alleging the regulator is over-reaching by implementing the “valid when made” rule. Last month, a similar group os AGs sued the Office of the Comptroller of the Currency for institution a “valid when made” rule of its own.
The rule, adopted by the OCC in June, closes 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.
The AGs argue that pre-empting non-federally chartered institutions from being forced to adhere to state regulations gives “predatory” lenders free reign to continue to charge usurious interest rates, which makes “consumers pay the price,” according to Xavier Becerra, the attorney general of California, in a statement.
In filing the lawsuit, the AGs are seeking to have the FDIC’s rule set aside, saying the agency overstepped its bounds by attempting to regulate institutions that do not fall under its regulatory purview.
“Preying on consumers in financial distress is bad enough,” Becerra said. “But giving these predatory lenders the key to evade the law meant to protect consumers is despicable. We’re taking the FDIC to court to stop this unlawful rule before it devastates American families struggling through financial distress.”
