Federal Judge Rejects Efforts to Block OCC and FDIC Rules Concerning Permissible Interest Rates on Transferred Loans

A federal judge in the U.S. District Court for the Northern District of California recently rejected an effort by multiple states to block the OCC’s Permissible Interest on Loans That Are Sold, Assigned, or Otherwise Transferred Rule (OCC Final Rule), claiming that the Final Rule violated the Administrative Procedure Act (APA).  The OCC Final Rule, which took effect on August 3, 2020, allows a national bank to transfer its loans to a third party without risk of lower state-law interest rate caps applying to them afterward. 

The OCC created the OCC Final Rule in response to a Second Circuit decision issued in 2020, which held that federal law preemption of state-by-state interest caps does not apply when a nonbank purchases debt from a national bank.  The OCC Final Rule provided that the interest permissible on a loan made by a national bank “shall not be affected by the sale, assignment, or other transfer of the loan.”  The states argued that the rule created a “regulatory vacuum,” which would allow non-banks to ignore state rate caps.  The states further argued that the OCC Final Rule was invalid because of the Second Circuit’s decision, and because the OCC’s interpretation of the National Bank Act (NBA) was not entitled to deference because it was arbitrary, capricious, or otherwise manifestly contrary to the statute’s provisions.

However, the court rejected this argument, noting that the OCC’s interpretation filled a statutory gap and was not manifestly contrary to the NBA’s provisions.  The court found that it was not unreasonable for the OCC to determine that giving greater certainty to the issue of which interest rate to apply and providing for a larger transfer market would “promote the safety and soundness of the national banking system.”

The same judge also granted summary judgment in a similar lawsuit involving the FDIC’s implementation of a final rule containing a similar provision concerning FDIC banks, the Federal Interest Rate Authority Rule (FDIC Final Rule).  The court rejected that challenge with an analysis similar to the analysis it applied to the OCC’s Final Rule, and incorporated its ruling on OCC’s Final Rule by reference.

For additional background information regarding the OCC Final Rule and the FDIC Final Rule, see WBK’s article here.

The OCC case is People of the State of California et al. v. The Office of the Comptroller of the Currency et al., No. 4:20-cv-05200 (N.D. Cal.).  The FDIC case is People of the State of California et al. v. Federal Deposit Insurance Corporation, No. 4:20-cv-05860 (N.D. Cal.).