On February 8, the U.S. District Court for the Northern District of California ruled against three states – California, Illinois, and New York – challenging the OCC’s rule on the “valid when made” doctrine.  In 2020, the OCC issued a final rule codifying the “valid when made” principle by clarifying that the determination of whether interest on a loan is permissible is determined when the loan is made and that a bank’s transfer of a loan to a third party does not impact the validity or enforceability of that interest.

In their complaint challenging the OCC Final Rule, the states contended that the issuance of the rule violated the Administrative Procedures Act in that the OCC rule is (i) arbitrary and capricious, (ii) in excess of its statutory authority, and (iii) an agency action taken without observance of procedure required by law.  In supporting these argument, the states claimed, among other things, that the OCC failed to meaningfully consider the rule’s inevitable facilitation of predatory “rent-a-bank” schemes by permitting lenders to evade state law by partnering with national banks.

In its order, the court rejected the states’ argument that the rule creates a regulatory vacuum that will permit non-banks to ignore state rate caps.  “The court concludes that the record does not demonstrate that the OCC ‘entirely failed to consider’ an important aspect of the problem.”  The court went on to state that “the OCC made an informed and reasoned decision” and that “these are matters within the OCC’s discretion and expertise, the court should defer to the OCC’s judgments and uphold the final rule.”

Michael Hsu, the Acting Comptroller of the OCC, issued a statement the next day stating that while the court’s ruling affirmed the validity of the OCC’s rule, this legal certainty should be used to the benefit of consumers and not be abused. “The OCC is committed to strong supervision that expands financial inclusion and ensures banks are not used as a vehicle for ‘rent-a-charter’ arrangements.”

Putting in Into Practice:  Resolving this lawsuit helps to relieve uncertainty in the primary and secondary markets for consumer and commercial credit, and in particular, for the secondary market for loans originated by national banks.