Client Alert

Not So Fast—State Attorneys General Seek to Enjoin OCC’s Final Rule Reaffirming “Valid When Made” Doctrine

04 Aug 2020

On July 29, 2020, the state attorneys general of California, Illinois, and New York filed suit against the Office of the Comptroller of the Currency (OCC) challenging the OCC’s Final Rule reaffirming the “valid when made” doctrine for loans originated by national banks. The challenge extends the uncertainty created by the Second Circuit’s Madden decision until the litigation is resolved.


As we reported, on May 29, 2020, the OCC finalized a rule reaffirming the “valid when made” doctrine for loans originated by a national bank (“Final Rule”). The Final Rule codifies the agency’s position that when a national bank or federal savings association sells, assigns, or otherwise transfers a loan, the interest rate on the loan that is permissible prior to the transfer continues to be permissible after the transfer. The Final Rule became effective on August 3, 2020.

According to the OCC, the Final Rule addresses the legal uncertainty created by the Second Circuit’s 2015 decision in Madden v. Midland Funding, LLC. In Madden,the Second Circuit held that Section 85 of the National Bank Act (NBA) (12 U.S.C. § 85), which allows national banks to charge interest in accordance with the state where the bank is located, does not apply after a national bank sells a loan to a non-bank. The Final Rule effectively reverses the Madden decision, which the OCC believes may negatively affect the availability of credit and “disrupt banks’ ability to serve consumers, businesses, and the broader economy efficiently and effectively.”

The Federal Deposit Insurance Corporation finalized a similar rule on June 25, 2020, which will apply to state banks as of August 21, 2020.

State AGs’ Challenge

The state attorneys general of California, Illinois, and New York (the “State AGs”) seek to set aside the Final Rule on both substantive and procedural grounds, which they and other state attorneys general had asserted previously in their comments on the proposed rule asking the OCC to withdraw the proposal. The OCC addressed these arguments in the Supplementary Information accompanying the Final Rule.

Substantive Arguments
  • The OCC impermissibly attempts to expand NBA preemption beyond national banks. According to the State AGs, the Final Rule impermissibly expands preemption under the NBA and Home Owners’ Loan Act (HOLA) to non-banks. The State AGs further assert that state interest caps do not interfere with national banks’ ability to make contracts or conduct the business of banking. They dismiss liquidity concerns, arguing that under the Madden ruling, national banks retain the ability to sell loans to other national banks (without a change to the interest rate) and to non-banks (as long as they adjust to a state-law-compliant rate).[1]
  • The OCC lacks authority to overturn Madden. The State AGs further contend that the OCC’s authority extends only to national banks, so it cannot preempt state law challenges to non-banks. They allege that the Second Circuit’s judicial construction of the statute trumps the agency’s interpretation.[2]
  • The Madden decision did not significantly interfere with lending. The State AGs assert that the evidence relied on by the OCC does not prove that the Madden decision had any impact on lending or national banks’ ability to manage liquidity.[3]
  • The Final Rule conflicts with the OCC’s long-standing interpretation of federal law. The State AGs, relying solely on comments regarding “rent-a-bank” schemes, argue that the OCC has always taken the position that extending interest rate protections to non-banks would raise safety and soundness concerns.[4]
Procedural Challenges
  • The OCC did not comply with the rulemaking requirements set forth in the Dodd-Frank Act for rules that seek to preempt state consumer financial laws.  According to the State AGs, prior to implementing the Final Rule, the OCC was required to make a state-by-state evaluation of the impact of each particular state consumer financial protection law on the ability of national banks to exercise their powers, consult with the CFPB, and present a record of substantive evidence to support its findings.[5]
  • The OCC failed to consider all of the evidence and/or the Final Rule is not supported by the record. The State AGs assert that their disagreement with the sufficiency of the evidence (empirical studies insufficient, no evidence of negative impact to liquidity) is also a procedural defect sufficient to enjoin the Final Rule.
  • The Final Rule is not entitled to Chevron deference. Relying on the Ninth Circuit’s opinion in Lusnak v. Bank of America, N.A., 883 F.3d 1185 (9th Cir. 2018), the State AGs contend that OCC preemption determinations are only entitled to Skidmore deference, i.e., “an agency’s views are ‘entitled to respect’ only to the extent that they have the ‘power to persuade’.” Id. at 1192.

The State AGs filed the complaint in the Northern District of California—perhaps due to their reliance on Lusnak—and specifically sought an assignment to the Oakland division even though the Final Rule applies nationwide and has no ties to Oakland. The case originally was assigned for all purposes to Magistrate Judge Corley, but magistrate judges can preside over civil actions only if both parties consent. The State AGs already filed a declination to the assignment, and the case was re-assigned to Judge Jeffrey White, who was nominated by President George W. Bush and confirmed by the Senate in 2002.


This complaint is the latest in a long line of state actions reflecting hostility toward federal regulation of federally chartered entities. The State AGs spend many pages of their complaint describing their respective state schemes for regulating interest rates, but include only passing references to the impact of the Madden ruling on federally chartered entities’ core banking functions. The basis for their asserted standing to pursue the action—purported harms caused by the inability to limit interest rates on loans acquired by non-banks and loss of state licensing revenue—similarly appears to ignore that the states have no jurisdiction to regulate the interest rates of these loans when originated.

The allegations in the complaint appear to conflate the “valid when made” doctrine with true lender issues, asserting repeatedly that the Final Rule will encourage “rent-a-bank” schemes. The State AGs do not address the OCC’s role in supervision and enforcement with respect to federally chartered entities, including any non-banks providing marketing, servicing, or other functions to these entities.

The State AGs have put at issue the scope of the Dodd-Frank Act provisions regarding OCC state-law preemption standards. See 12 U.S.C. § 25b(b)(5)(A). The OCC contends that these standards do not apply to the Final Rule because the Final Rule concerns the scope of authority granted to national banks under the NBA, not preemption of a state consumer financial law. The State AGs disagree, so the court may reach the issue.

Because the complaint raises both factual and legal issues, resolution of the State AGs’ claims could take some time. The Final Rule remains in effect absent a preliminary or final ruling otherwise by the court. But the challenge itself extends the uncertainty created by Madden.

[1] As explained in the Supplementary Information, the OCC considered and rejected these arguments finding, among other reasons, that the NBA “expressly authorizes national banks to make contracts[, and a]mong the essential rights associated with this power is the right to assign some or all of the benefits of a contract to a third party.”

[2] The OCC disagreed, explaining in the Supplementary Information that the Second Circuit did not find that NBA section 85 forecloses the OCC’s interpretation and did not rely on section 85 in its ruling.

[3] In the Supplementary Information, the OCC pointed to ongoing litigation as evidence of the uncertainty motivating the Final Rule and explained that it can and did rely on its supervisory expertise without the need for empirical or other data.

[4] The OCC emphasized that it has “consistently opposed predatory lending, including through relationships between banks and third parties,” and rejected the State AGs’ contention that the Final Rule would facilitate predatory lending.

[5] The OCC asserts that these requirements do not apply here because it is interpreting the substantive scope of the NBA, not making a preemption determination. 



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