The Federal Deposit Insurance Corporation (FDIC) issued a final rule on June 25 that reaffirms the enforceability of the interest rate terms of loans made by state-chartered banks and insured branches of foreign banks (collectively, state banks) following the sale, assignment, or transfer of the loan. The rule also provides that whether interest on a loan is permissible is determined at the time the loan is made, and is not affected by a change in state law, a change in the relevant commercial paper rate, or the sale, assignment, or other transfer of the loan. The final rule follows the FDIC’s proposed rule on this topic, and will take effect 30 days after publication in the Federal Register.
The Office of the Comptroller of the Currency (OCC) issued a similar final rule on May 25 that reaffirms the enforceability of the interest rate terms of national banks’ loans following their sale, assignment, or transfer. The OCC’s rule (on which we previously reported) takes effect 60 days after its June 2 publication in the Federal Register, or August 3.
Together, the OCC and FDIC final rules address statutory ambiguities that were highlighted by the US Court of Appeals for the Second Circuit’s decision in Madden v. Midland Funding, LLC. The FDIC’s final rule explicitly states that it seeks to maintain parity between state banks and national banks with respect to interest rate authority, and the final rule’s provisions parallel those adopted by the OCC in its rule. While Madden concerned the assignment of a loan by a national bank and interpreted Section 85 of the National Bank Act, the federal statutory provision governing state banks’ authority with respect to interest rates is patterned after and interpreted in the same manner as Section 85. Ultimately, the objective and effect of the FDIC’s rule are fundamentally the same as the OCC’s rule: to reaffirm that banks may assign their loans without impacting the validity or enforceability of the interest.
Like the OCC rule, the new FDIC rule effectively adopts the common law doctrines of “valid when made” and “most favored lender.” The former states that a loan that is not usurious at inception cannot subsequently become usurious by reason of its sale. The latter, among other benefits, permits state banks in a given state to charge interest at the maximum rate permitted to any state-chartered or licensed lending institution by the law of that host state.
The FDIC received 59 comment letters on the proposed rule from a variety of individuals and entities. While, according to the FDIC, many commenters were supportive of the proposed rule (and pointed to the legal uncertainty discussed in the proposal that has had negative effects on the primary and secondary markets for bank loans), many commenters also opposed the proposed rule. These commenters asserted that it exceeded the FDIC’s statutory authority, lacked a sufficient evidentiary basis, and would harm consumers.
The FDIC adopted the proposed rule generally as proposed, with certain technical changes intended to clarify the rule’s application and enhance consistency with the OCC’s rule. Specifically, proposed Section 331.4(e), defining the point in time at which it is determined whether interest on a state bank’s loan is permissible under Section 27 of the Federal Deposit Insurance Act (FDIA), as well as the effect of subsequent events such as the sale, assignment, or transfer of the loan, differed in certain respects from its counterpart in the OCC’s rule. Commenters suggested that this risked varying judicial interpretations of statutes that have historically been interpreted consistently, and recommended that the agencies harmonize the language of these provisions to reinforce that they accomplish the same result. Accordingly, the FDIC made certain nonsubstantive revisions to the text of Section 331.4(e) to more closely align with the text of the OCC’s rule.
In response to another comment, the FDIC made a clarifying change to the regulatory text of proposed Section 331.4(e) to ensure there is no ambiguity that the sale, assignment, or transfer of a partial interest in a loan would fall within the scope of proposed Section 331.4(e), and the loan’s interest rate terms would continue to be enforceable following such a transaction.
However, unlike the OCC’s rule, the FDIC’s rule explicitly states that the FDIC continues to support the position that it will view unfavorably entities that partner with a state bank with the sole goal of evading a lower interest rate cap established under the law of the entity’s licensing state(s).
Takeaways
Like the OCC’s rule, the FDIC rule should bring some additional certainty to the secondary loan market, especially in the commercially important Second Circuit (and many FDIC-regulated banks are participants in that market). That said, as we discussed previously, the FDIC’s rule does not trumpet an “all clear” message for fintechs and nonbank lenders that operate under a bank partnership model. Rather, those parties must remain vigilant at the structuring stage of loan purchase transactions.
The level of deference that courts afford to this agency rulemaking remains to be seen and involves difficult questions of constitutional and administrative law. Accordingly, whether the FDIC’s rule (like the OCC’s rule) effectively “overrules” the continued applicability of the Madden decision is an open point that may later be considered by the courts.
Neither the FDIC nor the OCC rule addresses the “true lender” issue, but in remarks made during a recent online event held by the Online Lending Policy Institute, Acting Comptroller of the Currency Brian Brooks indicated that the OCC will soon be issuing a “true lender” proposed rule to supplement its recent Madden final rule. According to Brooks, the OCC realized when it issued the final rule that it had left a “true lender gap” and will seek to “plug that gap” through the proposal. He also indicated that he expects the FDIC to partner with the OCC in formulating a “true lender” proposed rule.
As noted above, the FDIC’s rule does not become effective until 30 days after the date of publication in the Federal Register (which has not occurred yet). During this period, it remains to be seen whether any consumer groups may launch an Administrative Procedure Act challenge to prevent the rule from taking effect.
Finally, nothing in the FDIC’s rule prohibits or limits states from opting out of coverage of Section 27 of the FDIA as some jurisdictions (including Iowa and Puerto Rico) have done.