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Consumer Credit Regulation: 3.3.5 Riegle-Neal II Preemption Inapplicable to State Banks Without Host State Branch

For Riegle-Neal II preemption to apply, there must be strict compliance with Riegle-Neal II’s statutory language. Riegle-Neal II extends preemption only to credit offered by a host state branch of an out-of-state, state bank. If an out-of-state, state-chartered bank does not have branches in the host state, then Riegle-Neal II does not apply. Riegle-Neal II states that it “shall apply to any branch in the host State of an out-of-State State bank.”344

Consumer Credit Regulation: 3.3.6 Riegle-Neal II Preemption Where Main Office, Not Host State Branch Extends Credit

An unresolved issue is the application of Riegle-Neal II preemption to an out-of-state bank with a branch in the host state, where the loan is not extended by that branch, and where the loan functions are performed instead at a bank office outside the host state. Consider a predatory non-bank lender soliciting business in the host state, and where it arranges for the loans to be originated directly with the main office of an out-of-state, state-chartered bank and not at the bank’s host state branch. Does Riegle-Neal II apply?

Consumer Credit Regulation: 3.5.1 General

When a consumer brings a usury claim in the consumer’s state of residence and the creditor is located in another state, ordinarily the choice of laws principles of the state where the case is brought determine which state’s usury law applies.371 Often, the state’s fundamental policy of enforcing its own interest rate laws will override the choice of law provision in a contract.

Consumer Credit Regulation: 3.5.2.3.1 Overview of the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDA or DIDMCA)

The Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDA, also sometimes called DIDMCA), which amended the Federal Deposit Insurance Act (FDIA), provides that federally insured, state-chartered depositories (banks, savings banks, and credit unions) can charge the higher of 1% above the federal discount rate, the rate chosen by the host state’s law, or the rate allowed by the institution’s home state.

Consumer Credit Regulation: 3.5.2.5 Special Rule for Arkansas State Banks

There is a special rate provision in 12 U.S.C. § 1831u(f) that applies only to states with a constitutional provision limiting the maximum lawful rate of interest on a contract to no more than 5% above the discount rate for ninety-day commercial paper in effect at the federal reserve bank for the federal reserve district in which such state is located. This provision applies only to Arkansas.443

Consumer Credit Regulation: 3.5.2.6 Subsidiaries of Depositories

Rate exportation does not apply to subsidiaries of national banks or federal savings associations. Prior to the Dodd-Frank Act, the Supreme Court interpreted federal law as allowing national bank “operating” subsidiaries (but not “financial” subsidiaries446) to be treated the same as the national banks,447 and this implied that a national bank’s operating subsidiary could export its home state rate caps.

Consumer Credit Regulation: 3.5.3.2.1 Introduction to rights of assignees of bank loans

Banks and other depositories may assign their credit accounts under different scenarios, including selling defaulted accounts to debt buyers, selling loans to non-banks in a rent-a-bank scheme, or assigning accounts to a securitization trust. An important question is whether these assignees of bank-originated credit can ignore the interest rate laws of the consumer’s state that would normally apply to nonbank lenders.

Consumer Credit Regulation: 3.5.3.2.1a The OCC and FDIC rules

The OCC, effective August 3, 2020, issued a rule applicable to national banks that provides that “Interest on a loan that is permissible under 12 U.S.C. § 85 [i.e., under NBA rate exportation] shall not be affected by the sale, assignment, or other transfer of the loan.”461 The OCC with the same effective date issued a parallel rule applicable to federal savings associations.462

Consumer Credit Regulation: 3.5.3.2.1b Challenges to the OCC and FDIC rules

The OCC and FDIC rules have survived two legal challenges brought by several states before the same judge in the Northern District of California, one concerning the OCC rule471 and the other the FDIC rule.472 Interestingly, neither case confirmed that the OCC and FDIC were correct in their interpretation of the federal rate exportation statutes.

Consumer Credit Regulation: 3.5.3.2.2 Decisions considering assignee rights prior to the OCC or FDIC rules

It is too late at this point for another facial challenge to the OCC and FDIC rules under the Administrative Procedures Act. But it is possible that, in an as-applied context, other courts will find that the rules are invalid interpretations of the rate exportation laws and that the assignee is not permitted to charge the same rate that a bank could charge. For example, as in the facts of Madden v.

Consumer Credit Regulation: 3.5.4.1 Introduction

Rate exportation for federal or federally insured depositories—which effectively eliminated all interest rate limits for banks—is so attractive that non-depository creditors at times enter arrangements with depositories seeking to evade state usury laws—these arrangements are sometimes referred to as “rent-a-bank” or “rent-a-charter.” For example, the non-depository may solicit a loan, determine who receives the loan, service the loan, receive most of the profit from the loan, and take on almost all

Consumer Credit Regulation: 3.5.4.2.1 OCC and OTS Guidance and other actions

Between 2000 to 2005, the OCC and the Office of Thrift Supervision (OTS) used supervision and guidance to shut down rent-a-bank partnerships with traditional, short-term payday lenders.509 In 2019, the OCC began taking actions that supported a resurgence of rent-a-bank lending involving longer-term loans. But those actions had been curtailed by 2021.

Consumer Credit Regulation: 3.5.4.2.2 FDIC guidance and statements

The FDIC was initially slower than the OCC and OTS in curtailing rent-a-bank lending by payday lenders in the early 2000s.535 But eventually, the FDIC used supervision and guidance to shut down rent-a-bank partnerships with traditional, short-term payday lenders. But as rent-a-bank lending by longer-term lenders emerged, FDIC-supervised banks again became the bank of choice, with little action by the FDIC.