Treliant Takeaway: State Attorneys General Sue to Block “Madden Fix”
Read the complaints here: OCC True Lender, OCC Valid When Made, and FDIC Valid When Made
- Sources: ag.ny.gov, oag.ca.gov, and ncdoj.gov
Treliant knows compliance and FinTech partnerships. If you need help determining your risk exposure, we can help.
The Attorneys General of the States of New York, California, Colorado, Minnesota, New Jersey, and North Carolina, the Commonwealth of Massachusetts, and the District of Columbia have filed a lawsuit against Acting Comptroller Brian Brooks and the Office of the Comptroller of the Currency (OCC) seeking to block the OCC’s “True Lender” rule. This follows lawsuits by state Attorneys General challenging the OCC’s “Valid when Made” rule and the District of Columbia have filed suit against the Federal Deposit Insurance Corporation’s (FDIC) “Valid when Made” rule.
The “Valid when Made” rules generally hold that the interest rate on a loan made by a bank remains legal and enforceable regardless of the loan’s sale, assignment, or transfer as long as the interest rate was legal at origination. The “True Lender” rule determines that a loan made by a partnership between a national bank (or federal savings association) and a nonbank will be considered to have been made by the bank as long as the bank either is named as the lender on the loan documentation or funds the loan at origination.
Taken together, the OCC and FDIC rules are intended to solve for the disruption and uncertainty related to bank preemption of state usury laws in FinTech-bank partnership lending since the U.S. Court of Appeals for the Second Circuit decision in Madden v. Midland Funding. Although financial services firms have criticized the Madden decision and asked for certainty in regulatory standards, states and consumer advocates have alleged that the Madden Fix is essentially a “rent-a-charter scheme” allowing nonbanks to exploit bank charters to evade state usury laws and that the rules encroach on state authority.
Banks and FinTechs engaged in lending partnerships are encouraged to monitor these cases as they proceed. If your institution needs assistance in assessing the risk of partnership lending, or with designing a risk management program to meet your partnership lending needs, Treliant can help.