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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.

Consumer Credit Regulation: 3.5.5.2 Background on Branch Banking

In Marquette National Bank v. First of Omaha Corp., the Supreme Court held that the fact that a national bank in one state extends credit by mail to a consumer in a second state does not make the second state the bank’s home state.668 The Court reasoned that this was no different from an out-of-state customer coming across a state line to obtain a loan in the second state.

Consumer Credit Regulation: 3.5.5.5 Electronic Banking

An OCC regulation addresses where a bank is located when it maintains technology out-of-state. A national bank is not located in a state solely because it physically maintains technology in that state, such as a server or automated loan center; nor is it located in a state because the bank’s products or services are accessed through electronic means by consumers located in the state.699

Consumer Credit Regulation: 3.5.6.1 Introduction

The rules governing rate exportation determine which state’s laws apply to the charging of interest. The definition of “interest” thus is critical to application of rate exportation. If a fee or charge is not interest, then different preemption rules apply.702

Consumer Credit Regulation: 3.5.6.2 OCC and FDIC Definition of Interest

OCC and FDIC regulations define interest for purposes of national bank and federal savings association rate exportation as “any payment compensating a creditor or prospective creditor for an extension of credit, making available a line of credit, or any default or breach by a borrower of a condition upon which credit was extended.”707 The regulations pointedly state that this definition does not affect state law definitions of interest for purposes of state law interest rate limits.

Consumer Credit Regulation: 3.5.6.3 Definition of Interest: The Supreme Court’s Smiley Decision and Subsequent Court Rulings

Support for the OCC definition of interest is found in the Supreme Court’s decision in Smiley v. Citibank, where the Court found the OCC interpretation to be reasonable and also gave deference to an OCC ruling finding late fees to be interest.720 The Court drew a distinction between “payment compensating a creditor or prospective creditor for an extension of credit, making available of a line of credit, or any default or breach by a borrower” and all other payments.

Consumer Credit Regulation: 3.5.7 Remedies Where Rate Exceeds Depository’s Home State Cap

If a national bank or federal savings association charges a rate in excess of the amount allowed by applicable federal law (i.e., the amount allowed by the depository’s home state), the consumer’s remedy is under federal law.735 The operation of the remedy is more complicated in the case of state-chartered depositories, who can charge the higher of their home state rate (via rate exportation) or the applicable rate based on the choice of laws of the host state.