California Federal Court Upholds OCC and FDIC “Valid When Made” Rule

The Office of the Comptroller of the Currency (“OCC”) rule, OCC Bulletin 2020-57, titled Permissible Interest on Loans That Are Sold, Assigned, or Otherwise Transferred, was released in June 2, 2020. The initial bulletin acknowledges bank authority to change interest rates on loans, so long as the interest is within the “maximum rate permitted to any state-chartered or licensed lending institution in the state where the bank is located.”

Despite this authority, according to the terms of the rule, when a national bank or savings association sells, assigns, or transfers a loan, the interest rate that was in effect for the loan prior to the transfer continues after the transfer.

This regulatory action was echoed by the Federal Deposit Insurance Corporation (“FDIC”) when it issued a rule titled Interest Rate Authority, which clarified the irrelevance of a sale, assignment, or transfer of a loan or a change in state law on the interest rate that was assessed by an originating depository institution.  

These two regulatory efforts were challenged by several states, posing that the agencies violated the necessary procedures under the Administrative Procedures Act (“APA”) because they exceeded their statutory authority in promulgating these rules.

On February 8, 2022, the United States District Court for the Northern District of California issued two separate orders granting the regulatory agencies summary judgement after determining the rulemakings were not “unreasonable, arbitrary, or capricious”—effectively, upholding the OCC and FDIC rules.

After promulgation of the OCC rule, the OCC reportedly received concern over the rule creating a “rent-a-charter” scheme that could be utilized to evade the legal usury limits in a state. A statement by the OCC’s Acting Comptroller of the Currency Michael J. Hsu addressing the court decision negated these concerns by affirming the commitment of the agency to strong supervision and reminded those engaged in the federal banking system not to abuse the regulatory scheme.