California v. Office of Comptroller of Currency
| Decision Date | 08 February 2022 |
| Docket Number | Case No. 20-cv-05200-JSW |
| Citation | 584 F.Supp.3d 844 |
| Parties | People of the State of CALIFORNIA, et al., Plaintiffs, v. The OFFICE OF the COMPTROLLER OF the CURRENCY, et al., Defendants. |
| Court | U.S. District Court — Northern District of California |
Christopher Myron Lapinig, Wareewan Tina Charoenpong, California Department of Justice Office of the Attorney General, Los Angeles, CA, Nicklas A. Akers, California Department of Justice, San Francisco, CA, for Plaintiff People of the State of California.
Erin Danielle Grotheer, Pro Hac Vice, Caleb Andrew Rush, Illinois Attorney General's Office, Chicago, IL, for Plaintiff People of the State of Illinois.
Gavin Geraghty McCabe, Christopher L. McCall, New York State Attorney General's Office Consumer Frauds and Protection Bureau, New York, NY, for Plaintiff People of the State of New York.
Gabriel Hindin, Marsha S. Edney, Juan Pablo Perez-Sangimino, Michael Morelli, Office of the Comptroller of the Currency Litigation Group, Washington, DC, for Defendants.
ORDER RESOLVING CROSS-MOTIONS FOR SUMMARY JUDGMENT
Re: Dkt. Nos. 37, 44
Plaintiffs, the States of California, Illinois, and New York (collectively "Plaintiffs"), allege that Defendants, the Office of the Comptroller of the Currency and Michael J. Hsu, in his capacity as Acting Comptroller of the Currency (collectively "OCC" or "Defendants"), violated the Administrative Procedure Act ("APA") when the OCC promulgated a final rule entitled Permissible Interest on Loans That Are Sold, Assigned, or Otherwise Transferred ("Final Rule" or "Rule").1 See 85 Fed. Reg. 33,530 (June 2, 2020).2
Currently before the Court are the parties’ cross-motions for summary judgment.
The Court has considered the parties’ papers, the amicus briefs, the administrative record (Dkt. Nos. 35-1 through 35-3), and relevant legal authority.3 The Court HEREBY DENIES Plaintiffs’ motion and GRANTS the OCC's Cross-Motion.
The OCC has primary regulatory and supervisory responsibility over national banks and federal savings associations (collectively "national banks") pursuant to the National Bank Act of 1864 ("NBA") and the Home Owners’ Loan Act of 1933 ("HOLA"). See 12 U.S.C. §§ 1, et seq. , as amended; 12 U.S.C. §§ 1461, et seq. , as amended. In order to combat predatory lending, Plaintiffs, and at least 43 other states, have placed caps on the interest rates on consumer loans. See, e.g. , Cal. Fin. Code §§ 22303 - 22306 ; N.Y. Gen. Oblig. Law §§ 5-501, 5-11; N.Y. Banking Law § 14-a.
Under the NBA and HOLA, national banks are not subject to those state interest-rate caps and can "export" their home states’ interest rates to states where their borrowers live. See 12 U.S.C. §§ 85, 1463(g) ; Marquette Nat. Bank of Minneapolis v. First of Omaha Serv. Corp. , 439 U.S. 299, 301, 99 S.Ct. 540, 58 L.Ed.2d 534 (1978). The NBA and HOLA also preempt state law claims of usury against a national bank. See, e.g., Beneficial Nat'l Bank. v. Anderson , 539 U.S. 1, 11, 123 S.Ct. 2058, 156 L.Ed.2d 1 (2003). Plaintiffs assert that "some non-bank lenders have formed sham ‘rent-a-bank’ partnerships designed to evade state law" so they can take advantage of NBA and HOLA preemption. (Mot. at 3:10-11.) In this situation a third-party will partner with a national bank. The national bank originates the loan in question but subsequently transfers the loan to the third-party. That third-party will continue to charge the national bank's interest rate, even if that rate exceeds an interest rate cap in the state where the third-party is located. (See e.g. , AR at 69-73, 300, 302, 369-83.)
In 2015, the Second Circuit held that a plaintiff's usury claims against non-bank debt-collectors, which had been assigned a debt originated by a national bank, were not preempted by the NBA. Madden v. Midland Funding, LLC , 786 F.3d 246 (2d Cir. 2015). Although the court recognized that in some circumstances, "NBA preemption can be extended to non-national bank entities," it determined the defendants were not acting as the national bank's agent and were not its subsidiaries. The court also determined that the originating bank no longer had any interest in or control over the debt. Id. at 249-52. Instead, the debt collectors were acting "solely on their own behalves, as the owners of the debt." Id. at 251. On those facts, the court reasoned that applying state usury laws would not significantly interfere with the national bank's activities and "would limit only activities of the third party which are otherwise subject to state control, and which are not protected by federal banking law or subject to OCC oversight." Id. (internal quotations, citations, and brackets omitted).
According to the OCC, the Madden decision "created legal uncertainty about the ongoing permissibility of the interest term after a bank transfers a loan[,]" and it began rule-making proceedings to address and clarify that uncertainty.4 Final Rule, 85 Fed. Reg. at 33,530 -31; see also id. at 33,534 (). The Final Rule provides that "[i]nterest on a loan that is permissible under 12 U.S.C. 85 shall not be affected by the sale, assignment, or other transfer of the loan." 12 C.F.R. § 7.4001(e) ; see also 12 C.F.R. § 160.110(d) ().
The Court will address additional facts as necessary in the analysis.
On October 30, 2020, the OCC issued a rule entitled National Banks and Federal Savings Associations as Lenders , 85 Fed. Reg. 68,742 ("True Lender Rule"), which set forth a test to determine when a national bank that partners with a third-party "makes" a loan. That rule would have provided that when a national bank "makes a loan pursuant to the test established in th[e] regulation, the bank may subsequently sell, assign, or otherwise transfer the loan without affecting the permissible interest term, which is determined by reference to state law." Id. , at 68,743.
Plaintiffs ask the Court to take judicial notice of: (1) a Senate Resolution invalidating the True Lender Rule; and (2) portions of the Congressional Record that recount arguments presented in connection with the Resolution. (Request for Judicial Notice, Exs. A-B.) Although the OCC argues here that the True Lender Rule is not relevant to these proceedings, in the True Lender Rule it stated that "rulemaking operate[d] together with the OCC's recently finalized ‘Madden-fix’ rulemaking," i.e. , the rule at issue here. 85 Fed. Reg. at 68,743.
The Court OVERRULES the OCC's objections, in part. Because the OCC expressly stated the rulemaking proceedings operated together, the Court GRANTS the request to take judicial notice of the fact that the Senate Resolution was passed and that the True Lender Rule was invalidated. The Court shall consider those facts solely for the purpose of evaluating Plaintiffs’ arguments about why the Final Rule should be invalidated as an unreasonable interpretation of Section 85 and why it is arbitrary and capricious. Although the arguments presented in support of and in opposition to the Resolution mirror arguments raised here, the Congressional Record was not submitted to and was not considered by the OCC. Accordingly, the Court DENIES Plaintiffs’ request to take judicial notice of the Congressional Record.
Under the APA, a court shall "hold unlawful and set aside agency action, findings, and conclusions found to be -- (A) arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law; ... (C) in excess of statutory jurisdiction, authority, or limitations, or short of statutory right; [or] (D) without observance of procedure required by law[.]" 5 U.S.C. §§ 706(2)(A), (C) (D).5 A court's "review of an agency's procedural compliance is exacting, yet limited." Kern Cty. Farm Bureau v. Allen , 450 F.3d 1072, 1076 (9th Cir. 2006). In contrast, Motor Vehicle Mfr. Ass'n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co. , 463 U.S. 29, 43, 103 S.Ct. 2856, 77 L.Ed.2d 443 (1983) (internal quotations omitted) ("State Farm "); see also Chevron U.S.A. v. Natural Res. Def. Council, Inc. , 467 U.S. 837, 844, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984) ().
In their third claim, Plaintiffs allege the Final Rule was promulgated in violation of procedure required by law because the OCC did not comply with 12 U.S.C. section 25b (" Section 25b").6 That section of the NBA was enacted in 2010, as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"). (Compl. ¶¶ 220-223.) Section 25b provides, in relevant part, that:
To continue reading
Request your trial