Banks have a comparative advantage over FinTech lenders when it comes to state usury laws. Under the “most favored lender” doctrine, a national bank or a federal savings association may charge interest on a loan at the interest rate allowed by the state where the bank or federal savings association is located, and may apply this interest rate to borrowers in other states (notwithstanding the usury laws in those states). Other federally-insured financial institutions – state banks, savings associations, and credit unions – enjoy similar interest rate authority. In contrast, a non-bank FinTech lender must comply with the usury laws in every state in which it operates. This presents a significant challenge to FinTechs that wish to originate loans, as well as to banks, savings associations, and credit unions that wish to sell, assign, or transfer loans that they have originated to marketplace lenders and other FinTechs.
Historically, some banks and FinTechs sought to address these challenges via arrangements where the banks originated loans that they sold, assigned, or transferred to FinTechs. In 2015, this approach was called into question when the United States Court of Appeals for the Second Circuit issued a decision (Madden v. Midland Funding, LLC) holding that interest rate preemption under the National Bank Act (“NBA”) did not apply following a national bank’s assignment of a loan to a non-bank. In that case, Bank of America, a national bank located in Delaware, had sold a New York resident’s credit card loan bearing a 27% interest rate to a third-party debt collector. While the 27% interest rate loan had been permissible for Bank of America to make under the laws of its home state (Delaware), the 27% interest rate exceeded the 25% usury cap under New York law that would have otherwise been applicable to the loan had it been made by a national bank based in New York rather than a national bank based in Delaware. The Bank of America credit card customer accordingly sued the third-party debt collector, alleging, inter alia, that it had charged her a 27% interest rate that was usurious under New York law. Siding with the customer, the Second Circuit declined to extend NBA interest rate preemption from Bank of America to the third-party debt collector, writing that doing so would have created “an end-run around [state] usury laws for non-national bank entities.”
Madden caused great consternation in the banking and FinTech communities. In a boon to banks and FinTechs, last month the Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Corporation (“FDIC”) proposed regulations that would seek to address the uncertainty and lack of uniformity in the secondary credit markets that was created by Madden. The agencies have proposed to amend their interest rate regulations to provide that the interest rate that is permissible under the applicable federal banking statutes for a loan originated by a supervised bank or other financial institution will not be affected by the sale, assignment, or transfer of the loan. Specifically, the OCC is proposing to promulgate a regulation providing that the interest on a loan that is permissible under the NBA or the equivalent statute for federal savings associations “shall not be effected by the sale, assignment, or other transfer of the loan.” The FDIC’s proposed regulation, meanwhile, would provide that whether interest on a loan is permissible under the Federal Deposit Insurance Act would be “determined as of the date the loan was made,” and would not be affected by “any subsequent events, including a change in State law, a change in the relevant commercial paper rate after the loan was made, or the sale, assignment, or other transfer of the loan.” The FDIC and OCC’s proposed regulations are thus consistent with the common law “valid when made” principle, which provides that if a loan is non-usurious at origination, the loan does not subsequently become usurious when assigned.
The proposed regulations, if implemented, may be subject to legal challenges from states with strong usury protections as well as consumers and consumer advocacy groups. That said, the agencies appear to be on strong grounds in promulgating the regulations, as the agencies’ interpretations of the federal banking statutes that they administer are likely subject to Chevron deference.
Fintech lenders should take note, however, that the OCC and the FDIC were clear in their notices of proposed rulemaking that the proposed regulations are not intended to address the “true lender” theory that courts in some jurisdictions have recently adopted. Under the “true lender” theory, courts have held that a non-bank entity to which a high-interest loan was assigned by a bank was the loan’s “true lender” because it had the predominant economic interest in the loan. Accordingly, these courts have held that the non-bank entity, as the “true lender,” was subject to a state’s usury laws notwithstanding the fact that the loan was made by a bank entitled to federal preemption of state usury laws. Even if the OCC and FDIC promulgate the proposed regulations, therefore, FinTech lenders must still be wary of the “true lender” issue and should consult with counsel regarding strategies to mitigate the risk that a court would find them to be a loan’s “true lender.”
Banks should note that the FDIC and the OCC have also indicated that they will look with disfavor on banks that partner with non-banks whose “sole goal” is to evade a lower interest rate established under the law of the non-bank’s licensing state. Banks would be wise to work with counsel and to consult with regulators to mitigate the risk that regulators will view them as entering into arrangements with FinTech lenders intended solely to help those lenders evade state usury laws.
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