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Groups ask Education Dept. to stop preempting states on student lending
On July 7, the Conference of State Bank Supervisors (CSBS) and the North American Collection Agency Regulatory Association (NACARA) sent a letter to Department of Education Secretary Miguel Cardona urging the Department to rescind recent policies “claiming preemption or otherwise impairing state regulation of federal student loan servicers and debt collectors.” The letter acknowledges steps taken by the Department to facilitate coordination and collaboration with state financial regulators but notes that additional action is required to accomplish a shared mission of protecting student borrowers. Among other things, the letter discusses several Department actions taken over the years, including the Department’s 2018 position that state regulation of servicers of loans made under the William D. Ford Federal Direct Loan Program and the Federal Family Education Loan Program is preempted by federal law. The letter urges the Department “to rescind the 2018 preemption notice and formally recognize that state oversight and regulation is fully applicable to federal student loan servicers and debt collectors, entirely appropriate, and not in conflict with the purpose of the [Higher Education Act].” The letter also discusses revised guidance issued in May concerning the handling of outside requests for Department records and data. As previously covered by InfoBytes, the revised guidance supersedes the Department’s 2017 guidance and creates a “streamlined and expedited process” for reviewing information requests made by any state or federal authority for information pertaining to companies engaged in student loan lending or collections. However, CSBS and NACARA emphasize that the Department should “recognize that state financial regulators are independently authorized to access records in possession of the federal student loan servicers and debt collectors subject to state regulation.” Additionally, the letter requests, among other things, that the Department take additional action deemed necessary to “fully return” to a policy of collaboration for protecting student loan borrowers, pointing out that timing is important as most federal student loan repayments resume in October.
State AGs argue FDIC’s “valid-when-made rule” violates APA
On June 17, eight state attorneys general (from California, Illinois, Massachusetts, Minnesota, New Jersey, New York, North Carolina, and the District of Columbia) filed an opposition to the FDIC’s motion for summary judgment and reply in support of their motion for summary judgment in a lawsuit challenging the FDIC’s “valid-when-made rule.” As previously covered by InfoBytes, last August the AGs filed a lawsuit in the U.S. District Court for the Northern District of California arguing, among other things, that the FDIC does not have the power to issue the rule, and asserting that the FDIC has the power to issue “‘regulations to carry out’ the provisions of the [Federal Deposit Insurance Act]” but not regulations that would apply to non-banks. The AGs also claimed that the rule’s extension of state law preemption would “facilitate evasion of state law by enabling ‘rent-a-bank’ schemes,” and that the FDIC failed to explain its consideration of evidence contrary to its assertions, including evidence demonstrating that “consumers and small businesses are harmed by high interest-rate loans.” The complaint asked the court to declare that the FDIC violated the Administrative Procedures Act (APA) in issuing the rule and to hold the rule unlawful. The FDIC countered in May (covered by InfoBytes here) that the AGs’ arguments “misconstrue” the rule, which “does not regulate non-banks, does not interpret state law, and does not preempt state law.” Rather, the FDIC argued that the rule clarifies the FDIA by “reasonably” filling in “two statutory gaps” surrounding banks’ interest rate authority.
In response, the AGs argued that the rule violates the APA because the FDIC’s interpretation in its “Non-Bank Interest Provision” (Provision) conflicts with the unambiguous plain-language statutory text, which preempts state interest-rate caps for federally insured, state-chartered banks and insured branches of foreign banks (FDIC Banks) alone, and “impermissibly expands the scope of § 1831d to preempt state rate caps as to non-bank loan buyers of FDIC Bank loans.” Additionally, the AGs challenged the FDIC’s claim that its Provision “does not implicate rent-a-bank schemes or the true lender doctrine because the Provision only applies ‘if a bank actually made the loan,’” emphasizing that the FDIC’s “mere statement that it does not condone rent-a-bank schemes” is insufficient and that “choosing to not address true-lender issues is an insufficient response to comments that the Provision creates significant uncertainty about those issues.” Moreover, the AGs claimed that the Provision is “arbitrary and capricious” and fails to meaningfully address valid concerns and criticisms raised by commenters, and that the rule constitutes “in substance if not form, a reversal of the FDIC’s previous stance” that the FDIC is “obligated to acknowledge and explain.”
District Court stays CSBS’s fintech charter challenge while OCC reviews framework
On June 16, the U.S. District Court for the District of Columbia entered an order staying litigation in a lawsuit filed by the Conference of State Bank Supervisors (CSBS) challenging the OCC’s authority to issue Special Purpose National Bank Charters (SPNB). (Covered by InfoBytes here.) Earlier this year, the OCC responded to CSBS’s opposition to the agency’s alleged impending approval of an SPNB for a financial services provider (proposed bank), in which CSBS argued that the OCC was exceeding its chartering authority (covered by InfoBytes here). The OCC countered that the same fatal flaws that pervaded CSBS’s prior challenges, i.e., that its challenge is unripe and CSBS lacks standing, still remain (covered by InfoBytes here). Moreover, the agency argued, among other things, that the cited application (purportedly curing CSBS’s prior ripeness issues) is not for an SPNB (the proposed bank that has applied for the charter would conduct a full range of services, including deposit taking), but that even it if was an application for an SPNB charter, there are multiple additional steps that need to occur prior to the OCC issuing the charter, which made the challenge unripe.
According to CSBS’s unopposed motion to stay litigation, a “90-day stay would conserve the [p]arties’ and the [c]ourt’s resources by avoiding potentially unnecessary briefing and oral argument.” Further, in referring to acting Comptroller Michael Hsu’s testimony to the U.S. House of Representatives—in which he stated that “the OCC is currently reviewing various regulatory standards and pending actions, including the OCC’s framework for chartering national banks”—CSBS noted that the OCC has represented that it anticipates this review period will take approximately 90 days and that it does not intend to take any action towards granting a charter to the proposed bank during this period. Following the conclusion of the 90-day stay, the parties agreed to confer and submit to the court a joint status report on or before September 27 “addressing the status of the OCC’s plans with respect to processing applications for uninsured national bank charters, including the [proposed bank’s] charter application, and the [p]arties’ proposed schedule for proceeding with or resolving the present case.”
OCC supports national bank’s challenge to state law requiring interest payments on escrow accounts
On June 15, the OCC filed an amicus curiae brief in support of a defendant-appellant national bank in an appeal challenging a requirement under New York General Obligation Law § 5-601 that a defined interest rate be paid on mortgage escrow account balances. As previously covered by InfoBytes, the bank argued that the National Bank Act (NBA) preempts the state law, but the district court disagreed and issued a ruling in 2019 concluding that there is “clear evidence that Congress intended mortgage escrow accounts, even those administered by national banks, to be subject to some measure of consumer protection regulation.” The district court also determined that, with respect to the OCC’s 2004 real estate lending preemption regulation (2004 regulation), there is no evidence that “at this time, the agency gave any thought whatsoever to the specific question raised in this case, which is whether the NBA preempts escrow interest laws,” citing to and agreeing with the U.S. Court of Appeals for the Ninth Circuit’s decision in Lusnak v. Bank of America (which held that a national bank must comply with a California law that requires mortgage lenders to pay interest on mortgage escrow accounts, previously covered by InfoBytes here). The district court further applied the preemption standard from the 1996 Supreme Court decision in Barnett Bank of Marion County v. Nelson, and found that the law does not “significantly interfere” with the bank’s power to administer mortgage escrow accounts, noting that it only “requires the [b]ank to pay interest on the comparatively small sums” deposited into the accounts and does not “bar the creation of mortgage escrow accounts, or subject them to state visitorial control, or otherwise limit the terms of their use.”
In its amicus brief filed with the U.S. Court of Appeals for the Second Circuit, the OCC wrote that it “respectfully submits that the [appellate court] should reverse the decision of the [d]istrict [c]ourt and find that application of Section 5-601 to [the bank] is preempted by federal law,” adding that the 2019 ruling “upsets…settled legal principles” and “creates uncertainty regarding national banks’ authority to fully exercise real estate lending powers under the [NBA].” In addressing the district court’s application of Barnett, the OCC argued that the district court had incorrectly concluded that state laws cannot be preempted unless they “practical[ly] abrogat[e] or nullif[y] a national bank’s exercise of a federal banking power—a “stark contrast to the preemption standard set forth in Barnett and the OCC’s—as well as many other federal courts’—interpretation of that standard.” The OCC urged the appellate court to “conclude that a state law that requires a national bank to pay even a nominal rate of interest on a particular category of account impermissibly conflicts with a national bank’s power by disincentivizing the bank from continuing to offer the product. This is sufficient to trigger preemption under Barnett.”
The OCC further stated, among other things, that the district court also incorrectly disregarded the agency’s 2004 regulation, which the OCC said “specifically authorizes national banks to exercise their powers to make real estate loans ‘without regard to state law limitations concerning…[e]scrow accounts, impound accounts, and similar accounts….’” The agency further cautioned that the district court’s determination that the OCC’s 2004 regulation was not entitled to any level of deference was done in error and warned that “[i]f the OCC’s regulation regarding escrow accounts is rendered ineffective, this result could cause disruption within the banking industry by upsetting long-settled law regarding the applicability of state laws to national bank powers.”
OCC counters CSBS’s arguments in fintech charter challenge
On April 29, the OCC responded to the Conference of State Bank Supervisors’ (CSBS) most recent challenge to the OCC’s authority to issue Special Purpose National Bank Charters (SPNB). As previously covered by InfoBytes, CSBS filed a complaint last December opposing the OCC’s alleged impending approval of an SPNB for a financial services provider, arguing that the OCC is exceeding its chartering authority.
The OCC countered, however, that the same fatal flaws that pervaded CSBS’s prior challenges (covered by InfoBytes here), i.e., that its challenge is unripe and CSBS lacks standing, still remain. According to the OCC, the cited application (purportedly curing CSBS’s prior ripeness issues) is not for an SPNB—the proposed bank would conduct a full range of services, including deposit taking. Further, the OCC stated, even it if was an application for a SPNB charter, there are multiple additional steps that need to occur prior to the OCC issuing the charter, which made the challenge unripe. As to standing, the OCC asserted that any alleged injury to CSBS or its members is purely speculative. Finally, the OCC contended that CSBS’s challenge fails on the merits because the challenge relies on the premise that the company’s application must be for a SPNB, not a national bank, because the company is not going to apply for deposit insurance but there is no requirement in the National Bank Act, the Federal Deposit Insurance Act, or the Federal Reserve Act that requires all national banks to acquire FDIC insurance.
OCC urges court to uphold valid-when-made rule
On January 14, the OCC moved for summary judgment in an action filed by the California, Illinois, and New York attorneys general (collectively, “states”) challenging the OCC’s valid-when-made rule, arguing that the challenge is without merit and that the agency “reasonably interprets the ‘gap’ in [12 U.S.C. § 85] concerning what happens when a national bank sells, assigns, or transfers a loan.” As previously covered by InfoBytes, the OCC’s final rule was designed to effectively reverse the Second Circuit’s 2015 Madden v. Midland Funding decision and provides that “[i]nterest on a loan that is permissible under [12 U.S.C. § 85 for national bank or 12 U.S.C. § 1463(g)(1) for federal thrifts] shall not be affected by the sale, assignment, or other transfer of the loan.” The states challenged the rule, arguing that it is “contrary to the plain language” of section 85 (and section 1463(g)(1)) and “contravenes the judgment of Congress,” which declined to extend preemption to non-banks. Moreover, the states contend that the OCC “failed to give meaningful consideration” to the commentary received regarding the rule, essentially enabling “‘rent-a-bank’ schemes.”
In response, the OCC argued that not only does the final rule reasonably interpret the “gap” in section 85, it is consistent with section 85’s “purpose of facilitating national banks’ ability to operate their nationwide lending programs.” Moreover, the agency asserts that 12 U.S.C. § 25b’s preemption standards do not apply to the final rule, because, among other things, the OCC “has not concluded that a state consumer financial law is being preempted.” The final rule “addresses only the ‘substantive [ ] meaning’ of § 85” and Congress “expressly exempted OCC’s interpretations of § 85 from § 25b’s requirements.” Lastly, the OCC argued that it made an “informed and reasoned decision,” including addressing issues raised during the public comment period. Thus, the court should uphold the final rule and affirm summary judgment for the agency.
CSBS challenges OCC’s pending fintech charter
On December 22, the Conference of State Bank Supervisors (CSBS) filed a complaint in the U.S. District Court for the District of Columbia opposing the OCC’s impending approval of a national bank charter for a financial services provider (company), arguing that the OCC is exceeding its chartering authority. According to the complaint, the company’s charter is close to being formally approved by the OCC after being “solicited, vetted and in November 2020 accepted as complete” by the agency. The complaint asserts the company will continue its lending and payment activities (which are currently state-regulated) without obtaining deposit insurance from the FDIC. The complaint alleges that the company is applying for the OCC’s nonbank charter, which was invalidated by the U.S. District Court for the Southern District of New York in October 2019 (which concluded that the OCC’s Special Purpose National Bank Charter (SPNB) should be “set aside with respect to all fintech applicants seeking a national bank charter that do not accept deposits,” covered by InfoBytes here). CSBS argues that “by accepting and imminently approving” the company’s application, the “OCC has gone far beyond the limited chartering authority granted to it by Congress under the National Bank Act (the “NBA”) and other federal banking laws,” as the company is not engaged in the “business of banking.” CSBS seeks to, among other things, have the court declare the agency’s nonbank charter program unlawful and prohibit the approval of the company’s charter under the NBA without obtaining FDIC insurance.
OCC clarifies Dodd-Frank preemption standards
On December 18, the OCC released a letter clarifying the agency’s interpretation of preemption standards and requirements codified by Dodd-Frank in 12 U.S.C. § 25b. The letter notes that section 25b codifies three standards pursuant to which federal law may preempt state consumer financial law, focusing on the procedural requirements for OCC “preemption determinations,” which are “affirmative conclusion[s] by the OCC that federal law preempts a state consumer financial law” made under the Barnett standard in section 25b. The letter explains that a “preemption determination” is “limited to a regulation or order issued by the OCC that concludes that a state consumer financial law is preempted pursuant to the Barnett standard,” and does not include “[a]n OCC action that has only indirect or incidental effects on a state consumer financial law,” or when the OCC “concludes that (1) a state consumer financial law is preempted pursuant to the discriminatory effect or other federal law standards or (2) a state law other than a state consumer financial law is preempted.” The letter addresses the OCC’s authority to make preemption determinations by regulation or on a “case-by-case basis,” including the circumstances under which CFPB consultation is required, the substantial evidence standard, and the requirement to publish preemption determinations. It clarifies that the section 25b periodic review requirement applies to any OCC conclusion that a state consumer law is preempted, which is not limited to determinations made under the Barnett standard. The interpretive letter also confirms that section 25b does not affect OCC interpretations of the authority to charge interest under 12 U.S.C. § 85, addresses the level of deference the OCC is afforded with respect to its interpretations, and describes the agency’s framework for complying with the standards and requirements for preemption determinations.
District court: Credit reporting restrictions preempted by FCRA
On October 8, the U.S. District Court for the District of Maine granted a trade association’s motion for declaratory judgment against the Maine attorney general and the superintendent of Maine’s Bureau of Consumer Credit Protection (collectively, “defendants”) after it sued the state for enacting amendments to the Maine Fair Credit Reporting Act. The trade association—whose members include the three nationwide consumer credit reporting agencies (CRAs)—filed the lawsuit concerning the 2019 amendments, which, among other things, place restrictions on how medical debts can be reported by the CRAs and govern how CRAs must investigate debt that is allegedly a “product of ‘economic abuse.’” The trade association argued that the amendments, which attempt to regulate the contents of an individual’s consumer report, are preempted by the federal Fair Credit Reporting Act (FCRA). The parties’ main contention was over how broadly the language under FCRA Section 1681t(b)(1)(E) concerning “subject matter regulated under . . . [15 U.S. C. § 1681c] relating to information contained in consumer reports” should be understood. Plaintiffs argued that the language should be read to encompass all claims relating to information contained in consumer reports. The defendants, on the other hand, claimed that § 1681c should be read “as an itemized list of narrowly delineated subject matters, some of which relate to information contained in consumer reports, and only find preemption where a state imposes a requirement or prohibition that spills into one of those limited domains,” which in this case, the defendants countered, the amendments do not.
The court disagreed, concluding that, as a matter of law, the amendments are preempted by § 1681t(b)(1)(E). According to the court, Congress’ language and amendments to the FCRA’s structure “reflect an affirmative choice by Congress to set ‘uniform federal standards’ regarding the information contained in consumer credit reports,” and that “[b]y seeking to exclude additional types of information” from consumer reports, the amendments “intrude upon a subject matter that Congress has recently sought to expressly preempt from state regulation.”
New York district court grants interlocutory appeal request in escrow interest action
On September 29, the U.S. District Court for the Eastern District of New York granted a national bank’s request for interlocutory appeal of the court’s September 2019 decision denying the dismissal of a pair of actions, which alleged that the bank violated New York law by not paying interest on escrow amounts for residential mortgages. As previously covered by InfoBytes, last September, the district court concluded that the National Bank Act (NBA) does not preempt a New York law requiring interest on mortgage escrow accounts, because there is “clear evidence that Congress intended mortgage escrow accounts, even those administered by national banks, to be subject to some measure of consumer protection regulation.” The bank moved to amend the prior order and certify the preemption question for interlocutory appeal to the U.S. Court of Appeals for the Second Circuit. The court granted the motion stating that the case “presents one of the rare instances in which there would be system-wide benefits to granting an interlocutory appeal.” The court noted that certifying the question for appeal would foster an “effective and efficient judiciary” by saving the defendants and jurists “considerable time and effort” by not having to re-litigate the issue. Moreover, certifying for appeal would “materially advance the ultimate disposition of [the] litigation.”