[Federal Register Volume 84, Number 235 (Friday, December 6, 2019)]
[Proposed Rules]
[Pages 66845-66853]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-25689]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 84, No. 235 / Friday, December 6, 2019 /
Proposed Rules
[[Page 66845]]
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 331
RIN 3064-AF21
Federal Interest Rate Authority
AGENCY: Federal Deposit Insurance Corporation.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Federal Deposit Insurance Corporation (FDIC) is seeking
comment on proposed regulations clarifying the law that governs the
interest rates State-chartered banks and insured branches of foreign
banks (collectively, State banks) may charge. The proposed regulations
would provide that State banks are authorized to charge interest at the
rate permitted by the State in which the State bank is located, or one
percent in excess of the ninety-day commercial paper rate, whichever is
greater. The proposed regulations also would provide that whether
interest on a loan is permissible under section 27 of the Federal
Deposit Insurance Act would be determined at the time the loan is made,
and interest on a loan permissible under section 27 would not be
affected by subsequent events, such as a change in State law, a change
in the relevant commercial paper rate, or the sale, assignment, or
other transfer of the loan.
DATES: Comments will be accepted until February 4, 2020.
ADDRESSES: You may submit comments on the notice of proposed rulemaking
using any of the following methods:
Agency website: https://www.fdic.gov/regulations/laws/federal. Follow the instructions for submitting comments on the agency
website.
Email: [email protected]. Include RIN 3064-AF21 on the
subject line of the message.
Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments, Federal Deposit Insurance Corporation, 550 17th Street NW,
Washington, DC 20429.
Hand Delivery: Comments may be hand delivered to the guard
station at the rear of the 550 17th Street Building (located on F
Street) on business days between 7 a.m. and 5 p.m.
Public Inspection: All comments received, including any
personal information provided, will be posted generally without change
to https://www.fdic.gov/regulations/laws/federal.
FOR FURTHER INFORMATION CONTACT: James Watts, Counsel, Legal Division,
(202) 898-6678, [email protected]; Catherine Topping, Counsel, Legal
Division, (202) 898-3975, [email protected]; or Romulus Johnson,
Counsel, Legal Division, (202) 898-3820, [email protected].
SUPPLEMENTARY INFORMATION:
I. Policy Objectives
Federal law authorizes State banks to charge interest at the
maximum rate permitted to any State-chartered or licensed lending
institution in the State where the bank is located, or one percent in
excess of the ninety-day commercial paper rate, whichever is greater. A
bank's power to make loans implicitly carries with it the power to
assign loans, and thus, a State bank's statutory authority to make
loans at this rate necessarily includes the power to assign loans at
the same rate. The ability of an assignee to enforce a loan's interest-
rate terms is also consistent with fundamental principles of contract
law.
Despite these clear authorities, recent developments have created
uncertainty about the ongoing validity of interest-rate terms after a
State bank sells, assigns, or otherwise transfers a loan. The decision
of the U.S. Court of Appeals for the Second Circuit in Madden v.
Midland Funding, LLC \1\ has called into question the enforceability of
the interest rate terms of loan agreements following a bank's
assignment of a loan to a non-bank. The court concluded that 12 U.S.C.
85 (section 85)--which authorizes national banks to charge interest at
the rate permitted by the law of the State in which the national bank
is located, regardless of interest rate restrictions by other States--
does not apply to non-bank assignees of loans. While Madden concerned
the assignment of a loan by a national bank, the Federal statutory
provision governing State banks' authority with respect to interest
rates is patterned after and interpreted in the same manner as section
85. Therefore, Madden also has created uncertainty regarding the
enforceability of loans originated and sold by State banks. Moreover,
the decision continues to cause ripples with pending litigation
challenging longstanding market practices.
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\1\ 786 F.3d 246 (2d. Cir. 2015).
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Section 27 of the Federal Deposit Insurance Act (FDI Act) (12
U.S.C. 1831d) provides State banks the authority to charge interest at
the rate allowed by the law of the State where the bank is located, or
one percent more than the rate on ninety-day commercial paper,
whichever is greater. The legal ambiguity generated by Madden has led
the FDIC to consider issuing regulations implementing the relevant
statutory provisions.\2\ Uncertainty regarding the enforceability of
interest rate terms may hinder or frustrate loan sales, which are
crucial to the safety and soundness of State banks' operations for a
number of reasons. Loan sales enable State banks to increase their
liquidity in a crisis, to meet unusual deposit withdrawal demands, or
to pay unexpected debts. Loan sales also enable banks to make
additional loans and meet increased credit demand. Banks also may need
to sell loans to address excessive concentrations in particular asset
classes. In addition, banks may need to sell non-performing loans in
circumstances where it would be costly or inconvenient to pursue
collection strategies. There may be additional valid business reasons
for State banks to sell loans.
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\2\ The Secretary of the Treasury also recommended, in a July
2018 report to the President, that the Federal banking regulators
should ``use their available authorities to address challenges posed
by Madden.'' See ``A Financial System That Creates Economic
Opportunities: Nonbank Financials, Fintech, and Innovation,'' July
31, 2018, at p. 93 (available at: https://home.treasury.gov/sites/default/files/2018-07/A-Financial-System-that-Creates-Economic-Opportunities---Nonbank-Financi....pdf).
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Accordingly, the FDIC is proposing regulations that would implement
section 27 of the FDI Act. The proposed regulations would implement the
statutory provisions that authorize State banks to charge interest of
up to the greater of: One percent more than the rate on 90-day
commercial paper; or the rate permitted by the State in which the bank
is located. The proposed
[[Page 66846]]
regulations also would provide that whether interest on a loan is
permissible under section 27 would be determined at the time the loan
is made, and would not be affected by subsequent events, such as a
change in State law, a change in the relevant commercial paper rate, or
the sale, assignment, or other transfer of the loan. The regulations
also implement section 24(j) of the FDI Act \3\ to provide that the
laws of a State in which a State bank is not chartered in but in which
it maintains a branch (host State), shall apply to any branch in the
host State of an out-of-State State bank to the same extent as such
State laws apply to a branch in the host State of an out-of-State
national bank. The regulations do not address the question of whether a
State bank or insured branch of a foreign bank is a real party in
interest with respect to a loan or has an economic interest in the loan
under state law, e.g., which entity is the ``true lender.'' Moreover,
the FDIC supports the position that it will view unfavorably entities
that partner with a State bank with the sole goal of evading a lower
interest rate established under the law of the entity's licensing
State(s).
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\3\ 12 U.S.C. 1831a(j).
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II. Background: Current Regulatory Approach and Market Environment
A. National Banks' Interest Rate Authority
The statutory provisions that would be implemented by the proposed
rule are patterned after, and have been interpreted consistently with,
section 85 to provide competitive equality among federally-chartered
and State-chartered depository institutions. While the proposed rule
would implement the FDI Act, rather than section 85, the following
background information is intended to frame the discussion of the
proposed rule.
Section 30 of the National Bank Act was enacted in 1864 to protect
national banks from discriminatory State usury legislation. The statute
provided alternative interest rates that national banks were permitted
to charge their customers pursuant to Federal law. Section 30 was later
divided and renumbered, with the interest rate provisions becoming
current sections 85 and 86. Under section 85, a national bank may:
Take, receive, reserve, and charge on any loan or discount made, or
upon any notes, bills of exchange, or other evidences of debt,
interest at the rate allowed by the laws of the State, Territory, or
District where the bank is located, or at a rate of 1 per centum in
excess of the discount rate on ninety-day commercial paper in effect
at the Federal reserve bank in the Federal reserve district where
the bank is located, whichever may be the greater, and no more,
except that where by the laws of any State a different rate is
limited for banks organized under State laws, the rate so limited
shall be allowed for associations organized or existing in any such
State under title 62 of the Revised Statutes.\4\
\4\ 12 U.S.C. 85.
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Soon after the statute was enacted, the Supreme Court's decision in
Tiffany v. National Bank of Missouri interpreted the statute as
providing a ``most favored lender'' protection.\5\ In Tiffany, the
Supreme Court construed section 85 to allow a national bank to charge
interest at a rate exceeding that permitted for State banks if State
law permitted nonbank lenders to charge such a rate. By allowing
national banks to charge interest at the highest rate permitted for any
competing State lender by the laws of the State in which the national
bank is located, section 85's language providing national banks ``most
favored lender'' status protects national banks from State laws that
could place them at a competitive disadvantage vis-[agrave]-vis State
lenders.\6\
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\5\ 85 U.S. 409 (1873).
\6\ See Fisher v. First National Bank, 548 F.2d 255, 259 (8th
Cir. 1977); Northway Lanes v. Hackley Union National Bank & Trust
Co., 464 F.2d 855, 864 (6th Cir. 1972).
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Subsequently, the Supreme Court interpreted section 85 to allow
national banks to ``export'' the interest rates of their home States to
borrowers residing in other States. In Marquette National Bank v. First
of Omaha Service Corporation,\7\ the Court held that because the State
designated on the national bank's organizational certificate was
traditionally understood to be the State where the bank was ``located''
for purposes of applying section 85, a national bank cannot be deprived
of this location merely because it is extending credit to residents of
a foreign State. Since Marquette was decided, national banks have been
allowed to charge interest rates authorized by the State where the
national bank is located on loans to out-of-State borrowers, even
though those rates may be prohibited by the State laws where the
borrowers reside.\8\
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\7\ 439 U.S. 299 (1978).
\8\ See Smiley v. Citibank (South Dakota), N.A., 517 U.S. 735
(1996).
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B. Interest Rate Authority of State Banks
In the late 1970s, monetary policy was geared towards combating
inflation and interest rates soared.\9\ State-chartered lenders,
however, were constrained in the interest they could charge by State
usury laws, which often made loans economically unfeasible. National
banks did not share this restriction because section 85 permitted them
to charge interest at higher rates set by reference to the then-higher
Federal discount rates.
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\9\ See United State v. Ven-Fuel, Inc., 758 F.2d 741, 764 n.20
(1st Cir. 1985) (discussing fluctuations in the prime rate from 1975
to 1983).
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To promote competitive equality in the nation's banking system and
reaffirm the principle that institutions offering similar products
should be subject to similar rules, Congress incorporated language from
section 85 into the Depository Institutions Deregulation and Monetary
Control Act of 1980 (DIDMCA) \10\ and granted all federally-insured
financial institutions--State banks, savings associations, and credit
unions--similar interest rate authority to that provided to national
banks.\11\ The incorporation was not mere happenstance. Congress made a
conscious choice to incorporate section 85's standard.\12\ More
specifically, section 521 of DIDMCA added a new section 27 to the FDI
Act, which provides:
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\10\ Public Law 96-221, 94 Stat. 132, 164-168 (1980).
\11\ See Statement of Senator Bumpers, 126 Cong. Rec. 6,907
(Mar. 27, 1980).
\12\ See Greenwood Trust Co. v. Massachusetts, 971 F.2d 818, 827
(1st Cir. 1992); 126 Cong. Rec. 6,907 (1980) (statement of Senator
Bumpers); 125 Cong. Rec. 30,655 (1979) (statement of Senator Pryor).
(a) INTEREST RATES.--In order to prevent discrimination against
State-chartered insured depository institutions, including insured
savings banks, or insured branches of foreign banks with respect to
interest rates, if the applicable rate prescribed by this subsection
exceeds the rate such State bank or insured branch of a foreign bank
would be permitted to charge in the absence of this subsection, such
State bank or such insured branch of a foreign bank may,
notwithstanding any State constitution or statute which is hereby
preempted for the purposes of this section, take, receive, reserve,
and charge on any loan or discount made, or upon any note, bill of
exchange, or other evidence of debt, interest at a rate of not more
than 1 per centum in excess of the discount rate on ninety-day
commercial paper in effect at the Federal Reserve bank in the
Federal Reserve district where such State bank or such insured
branch of a foreign bank is located or at the rate allowed by the
laws of the State, territory, or district where the bank is located,
whichever may be greater.\13\
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\13\ 12 U.S.C. 1831d(a).
As stated above, section 27(a) of the FDI Act was patterned after
section 85.\14\ Because section 27 was patterned after section 85 and
uses similar language, courts and the FDIC have consistently
[[Page 66847]]
construed section 27 in pari materia with section 85.\15\ Section 27
has been construed to permit a State bank to export to out-of-State
borrowers the interest rate permitted by the State in which the State
bank is located, and to preempt the contrary laws of such borrowers'
States.\16\
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\14\ Interest charges for savings associations are governed by
section 4(g) of the Home Owners' Loan Act (12 U.S.C. 1463(g)), which
is also patterned after section 85. See DIDMCA, Public Law 96-221.
\15\ See, e.g., Greenwood Trust Co., 971 F.2d at 827; FDIC
General Counsel's Opinion No. 11, Interest Charges by Interstate
State Banks, 63 FR 27282 (May 18, 1998).
\16\ Greenwood Trust Co., 971 F.2d at 827.
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Pursuant to section 525 of DIDCMA,\17\ States may opt out of the
coverage of section 27. This opt-out authority is exercised by adopting
a law, or certifying that the voters of the State have voted in favor
of a provision which states explicitly that the State does not want
section 27 to apply with respect to loans made in such State. Iowa and
Puerto Rico have opted out of the coverage of section 27 in this
manner.\18\
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\17\ 12 U.S.C. 1831d note.
\18\ See 1980 Iowa Acts 1156 Sec. 32; P.R. Laws Ann. tit. 10
Sec. 9981. Some other States have previously opted out for a number
of years, but either rescinded their respective opt-out statutes or
allowed them to expire.
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C. Interstate Branching Statutes
The Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (Riegle-Neal I) generally established a Federal framework for
interstate branching for both State banks and national banks.\19\ Among
other things, Riegle-Neal I addressed the appropriate law to be applied
to out-of-State branches of interstate banks. With respect to national
banks, the statute amended 12 U.S.C. 36 to provide for the
inapplicability of specific host State laws to branches of out-of-State
national banks, under specified circumstances, including where Federal
law preempted such State laws with respect to a national bank.\20\ The
statute also provided for preemption where the Comptroller of the
Currency determines that State law discriminates between an interstate
national bank and an interstate State bank.\21\ Riegle-Neal I, however,
did not include similar provisions to exempt interstate State banks
from the application of host State laws. The statute instead provided
that the laws of host States applied to branches of interstate State
banks in the host State to the same extent such State laws applied to
branches of banks chartered by the host State.\22\ This left State
banks at a competitive disadvantage when compared with national banks,
which benefited from preemption of certain State laws.
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\19\ Public Law 103-328, 108 Stat. 2338 (Sept. 29, 1994).
\20\ 12 U.S.C. 36(f)(1)(A), reads, in relevant part:
The laws of the host State regarding community reinvestment,
consumer protection, fair lending, and establishment of intrastate
branches shall apply to any branch in the host State of an out-of-
State national bank to the same extent as such State laws apply to a
branch of a bank chartered by that State, except--
(i) when Federal law preempts the application of such State laws
to a national bank.
\21\ 12 U.S.C. 36(f)(1)(A)(ii).
\22\ Public Law 103-328, sec. 102(a).
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Congress provided interstate State banks parity with interstate
national banks three years later, through the Riegle-Neal Amendments
Act of 1997 (Riegle-Neal II).\23\ Riegle-Neal II amended the language
of section 24(j)(1) to read as it does today:
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\23\ Public Law 105-24, 111 Stat. 238 (July 3, 1997).
(j) ACTIVITIES OF BRANCHES OF OUT-OF-STATE BANKS--
(1) APPLICATION OF HOST STATE LAW--The laws of a host State,
including laws regarding community reinvestment, consumer
protection, fair lending, and establishment of intrastate branches,
shall apply to any branch in the host State of an out-of-State State
bank to the same extent as such State laws apply to a branch in the
host State of an out-of State national bank. To the extent host
State law is inapplicable to a branch of an out-of- State State bank
in such host State pursuant to the preceding sentence, home State
law shall apply to such branch.\24\
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\24\ 12 U.S.C. 1831a(j)(1).
Under section 24(j), the laws of a host State apply to branches of
interstate State banks to the same extent such State laws apply to a
branch of an interstate national bank. If laws of the host State are
inapplicable to a branch of an interstate national bank, they are
equally inapplicable to a branch of an interstate State bank.
D. Agencies' Interpretations of the Statutes
The FDIC has not issued regulations implementing sections 24(j) and
27 of the FDI Act, but these provisions have been interpreted in two
published opinions of the FDIC's General Counsel. General Counsel's
Opinion No. 10, published in April 1998, clarified that for purposes of
section 27, the term ``interest'' includes those charges that a
national bank is authorized to charge under section 85.25 26
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\25\ FDIC General Counsel's Opinion No. 10, Interest Charged
Under Section 27 of the Federal Deposit Insurance Act, 63 FR 19258
(Apr. 17, 1998).
\26\ The primary OCC regulation implementing section 85 is 12
CFR 7.4001. Section 7.4001(a) defines ``interest'' for purposes of
section 85 to include the numerical percentage rate assigned to a
loan and also late payment fees, overlimit fees, and other similar
charges. Section 7.4001(b) defines the parameters of the ``most
favored lender'' and ``exportation'' doctrines for national banks.
The OCC rule implementing section 4(g) of the Home Owners' Loan Act
for both Federal and State savings associations, 12 CFR 160.110,
adopts the same regulatory definition of ``interest'' provided by
section 7.4001(a).
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The question of where banks are ``located'' for purposes of
sections 27 and 85 has been the subject of interpretation by both the
OCC and FDIC. Following the enactment of Riegle-Neal I and Riegle-Neal
II, the OCC has concluded that while ``the mere presence of a host
state branch does not defeat the ability of a national bank to apply
its home state rates to loans made to borrowers who reside in that host
state, if a branch or branches in a particular host state approves the
loan, extends the credit, and disburses the proceeds to a customer,
Congress contemplated application of the usury laws of that state
regardless of the state of residence of the borrower.'' \27\
Alternatively, where a loan cannot be said to be made in a host State,
the OCC concluded that ``the law of the home state could always be
chosen to apply to the loans.'' \28\
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\27\ Interpretive Letter No. 822 at 9 (citing statement of
Senator Roth).
\28\ Interpretive Letter No. 822 at 10.
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FDIC General Counsel's Opinion No. 11, published in May 1998, was
intended to address questions regarding the appropriate State law, for
purposes of section 27, that should govern the interest charges on
loans made to customers of a State bank that is chartered in one State
(its home State) but has a branch or branches in another State (its
host State).\29\ Consistent with the OCC's interpretations regarding
section 85, the FDIC's General Counsel concluded that the determination
of which State's interest rate laws apply to a loan made by such a bank
depends on the location where three non-ministerial functions involved
in making the loan occur--loan approval, disbursal of the loan
proceeds, and communication of the decision to lend. If all three non-
ministerial functions involved in making the loan are performed by a
branch or branches located in the host State, the host State's interest
provisions would apply to the loan; otherwise, the law of the home
State would apply. Where the three non-ministerial functions occur in
different States or banking offices, host State rates may be applied if
the loan has a clear nexus to the host State.
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\29\ FDIC General Counsel's Opinion No. 11, Interest Charges by
Interstate State Banks, 63 FR 27282 (May 18, 1998).
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The effect of FDIC General Counsel's Opinions No. 10 and No. 11 was
to promote parity between State banks and national banks with respect
to interest charges. Importantly, in the context of interstate banking,
the opinions confirm that section 27 of the FDI Act permits
[[Page 66848]]
State banks to export interest charges allowed by the State where the
bank is located to out-of-State borrowers, even if the bank maintains a
branch in the State where the borrower resides.
E. Assignees' Right To Enforce Interest Rate Terms
Banks' power to make loans implicitly carries with it the power to
assign loans,\30\ and thus, a State bank's statutory authority under
section 27 to make loans at particular rates necessarily includes the
power to assign the loans at those rates. Denying an assignee the right
to enforce a loan's terms would effectively prohibit assignment and
render the power to make the loan at the rate provided by the statute
illusory.
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\30\ See Planters' Bank of Miss. v. Sharp, 47 U.S. 301, 322-23
(1848).
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The inherent authority of State banks to assign loans that they
make is consistent with State banking laws, which typically grant State
banks the power to sell or transfer loans, and more generally, to
engage in banking activities similar to those listed in the National
Bank Act and activities that are ``incidental to banking.'' \31\ The
National Bank Act specifically authorizes national banks to sell or
transfer loan contracts by allowing them to ``negotiate[]'' (i.e.,
transfer) ``promissory notes, drafts, bills of exchange, and other
evidences of debt.'' \32\
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\31\ States' ``wild card'' or parity statutes typically grant
State banks competitive equality with national banks under
applicable Federal statutory or regulatory authority. Such authority
is provided either: (1) Through state legislation or regulation; or
(2) by authorization of the state banking supervisor. See, e.g., N.Y
Banking Law Sec. 961(1) (granting New York-chartered banks the
power to ``discount, purchase and negotiate promissory notes,
drafts, bills of exchange, other evidences of debt, and obligations
in writing to pay in installments or otherwise all or part of the
price of personal property or that of the performance of services;
purchase accounts receivable . . .; lend money on real or personal
security; borrow money and secure such borrowings by pledging
assets; buy and sell exchange, coin and bullion; and receive
deposits of moneys, securities or other personal property upon such
terms as the bank or trust company shall prescribe; and exercise all
such incidental powers as shall be necessary to carry on the
business of banking'').
\32\ 12 U.S.C. 24(Seventh); see also 12 CFR 7.4008 (``A national
bank may make, sell, purchase, participate in, or otherwise deal in
loans . . . subject to such terms, conditions, and limitations
prescribed by the Comptroller of the Currency and any other
applicable Federal law.''). The OCC has interpreted national banks'
authority to sell loans under 12 U.S.C. 24 to reinforce the
understanding that national banks' power to charge interest at the
rate provided by section 85 includes the authority to convey the
ability to continue to charge interest at that rate. As the OCC has
explained, application of State usury law in such circumstances
would be preempted under the standard set forth in Barnett Bank of
Marion County, N.A. v. Nelson, 517 U.S. 25 (1996). See Brief for
United States as amicus curiae, Midland Funding, LLC v. Madden (No.
15-610), at 11.
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The ability of a nonbank assignee to enforce interest-rate terms is
also consistent with fundamental principles of contract law. It is well
settled that an assignee succeeds to all the assignor's rights in a
contract, standing in the shoes of the assignor.\33\ This includes the
right to receive the consideration agreed upon in the contract, which
for a loan, includes the interest agreed upon by the parties.\34\ Under
this ``stand-in-the-shoes'' rule, the non-usurious character of a loan
would not change when the loan changes hands, because the assignee is
merely enforcing the rights of the assignor and stands in the
assignor's shoes.
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\33\ See Dean Witter Reynolds Inc. v. Variable Annuity Life Ins.
Co., 373 F.3d 1100, 1110 (10th Cir. 2004); see also Tivoli Ventures,
Inc. v. Bumann, 870 P.2d 1244, 1248 (Colo. 1994) (``As a general
principle of contract law, an assignee stands in the shoes of the
assignor.''); Gould v. Jackson, 42 NW2d 489, 490 (Wis. 1950)
(assignee ``stands exactly in the shoes of [the] assignor,'' and
``succeeds to all of his rights and privileges'').
\34\ See Olvera v. Blitt & Gaines, P.C., 431 F.3d 285, 286-88
(7th Cir. 2005) (assignee of a debt is free to charge the same
interest rate that the assignor charged the debtor, even if, unlike
the assignor, the assignee does not have a license that expressly
permits the charging of a higher rate). As the Olvera court noted,
``the common law puts the assignee in the assignor's shoes, whatever
the shoe size.'' 431 F.3d at 289.
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Section 27 does not state at what point in time the permissibility
of interest should be determined in order to assess whether a State
bank is taking or receiving interest in compliance with section 27.
Situations may arise when the usury laws of the State where the bank is
located change after a loan is made (but before the loan has been paid
in full), and a loan's rate may be non-usurious under the old law but
usurious under the new law. Similar issues arise where a loan is made
in reliance on the Federal commercial paper rate, and that rate changes
before the loan is paid in full. To fill this statutory gap and carry
out the purpose of section 27, the FDIC concludes that the
permissibility of interest under section 27 must be determined when the
loan is made, not when a particular interest payment is ``taken'' or
``received.'' This interpretation protects the parties' expectations
and reliance interests at the time when a loan is made, and provides a
logical and fair rule that is easy to apply. Under the proposed
regulation, the permissibility of interest is determined when a loan is
made, and is not affected by later events such as a change in State law
or the sale, assignment, or other transfer of the loan. The FDIC's
interpretation of section 27 is based on the need for a workable rule
to determine the timing of compliance with that section. This
interpretation is not based on the common law ``valid when made'' rule,
although it is consistent with it. That rule provides that usury must
exist at the inception of the loan for a loan to be deemed usurious; as
a corollary, if the loan was not usurious at inception, the loan cannot
become usurious at a later time, such as upon assignment, and the
assignee may lawfully charge interest at the rate contained in the
transferred loan.\35\
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\35\ See Nichols v. Fearson, 32 U.S. (7. Pet.) 103, 109 (1833)
(``a contract, which in its inception, is unaffected by usury, can
never be invalidated by any subsequent usurious transaction''); see
also Gaither v. Farmers & Merchants Bank of Georgetown, 26 U.S. 37,
43 (1828) (``[T]he rule cannot be doubted, that if the note free
from usury, in its origin, no subsequent usurious transactions
respecting it, can affect it with the taint of usury.''); FDIC v.
Lattimore Land Corp., 656 F.2d 139 (5th Cir. 1981) (bank, as the
assignee of the original lender, could enforce a note that was not
usurious when made by the original lender even if the bank itself
was not permitted to make loans at those interest rates); FDIC v.
Tito Castro Constr. Co., 548 F. Supp. 1224, 1226 (D. P.R. 1982)
(``One of the cardinal rules in the doctrine of usury is that a
contract which in its inception is unaffected by usury cannot be
invalidated as usurious by subsequent events.'').
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The ability of an assignee to rely on the enforceability and
collectability in full of a loan that is validly made is also central
to the stability and liquidity of the domestic loan markets.
Restrictions on assignees' abilities to enforce interest rate terms
would result in extremely distressed market values for many loans,
frustrating the purpose of the FDI Act.
F. Need for Rulemaking and Rulemaking Authority
The FDIC has previously proposed to issue regulations implementing
sections 24(j) and 27 of the FDI Act. In December 2004, a petition for
rulemaking was filed with the FDIC seeking the issuance of regulations
implementing sections 24(j) and 27 of the FDI Act, codifying the two
longstanding opinions of the FDIC's General Counsel discussed above,
and clarifying the interest rates that interstate State banks may
charge. The petitioners were concerned, in particular, with restoring
parity between State banks and national banks following the issuance of
regulations by the OCC that preempted certain State laws with respect
to national banks.\36\
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\36\ See 70 FR 13413 (Mar. 21, 2005) (notice of hearing and
petition).
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The FDIC held a public hearing on the petition on May 24, 2005, and
a number of interested parties presented their views at the hearing or
in writing. Following this hearing, the FDIC issued a notice of
proposed rulemaking for regulations that would implement
[[Page 66849]]
sections 24(j) and 27, and solicited public comment on this proposal.
The FDIC never finalized the proposed rule; however, subsequent changes
to the statutory and regulatory framework governing the preemption of
State laws may have addressed the petitioners' concerns.\37\
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\37\ The Dodd-Frank Act amended the National Bank Act by
codifying a preemption standard in 12 U.S.C. 25b. In July 2011, the
OCC implemented a final rule revising its preemption regulations to
incorporate this standard. See 12 CFR 7.4007, 7.4008, 34.4. Under
this standard, a ``state consumer financial law'' is generally
preempted if it would have a ``discriminatory effect'' on national
banks or in accordance with the legal standard in the Supreme
Court's decision in Barnett Bank. However, section 25b preserved
interest rate preemption.
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In proposing regulations that would implement sections 24(j) and
27, the FDIC is now seeking to address a different concern. As
discussed above, a recent court decision has created uncertainty as to
the ability of assignees to enforce interest-rate provisions of loans
originated by banks. This court held that, under the facts presented in
that case, nonbank debt collectors who purchase debt \38\ from national
banks are subject to usury laws of the debtor's State \39\ and do not
benefit from the interest-rate provisions of section 85 because State
usury laws do not ``significantly interfere with a national bank's
ability to exercise its power under the [National Bank Act].'' \40\ The
court's decision created uncertainty and a lack of uniformity in
secondary credit markets. While Madden interpreted section 85, rather
than the FDI Act, section 27 is patterned after section 85 and receives
the same interpretation as section 85. Thus, Madden also creates
uncertainty with respect to State banks' authorities. Through the
proposed regulations implementing section 27, the FDIC would reaffirm
the enforceability of a loan's interest rate by an assignee of a State
bank and reaffirm its position that the preemptive power of section 27
extends to such transactions.
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\38\ In Madden, the relevant debt was a consumer debt (credit
card) account.
\39\ A violation of New York's usury laws also subjected the
debt collector to potential liability imposed under the Fair Debt
Collection Practices Act, 15 U.S.C. 1692e, 1692f.
\40\ Madden, 786 F.3d at 251 (citing Barnett Bank of Marion
City, N.A. v. Nelson, 517 U.S. 25, 33 (1996); Pac. Capital Bank,
N.A. v. Connecticut, 542 F.3d 341, 353 (2d. Cir. 2008)).
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The FDIC also seeks to maintain parity between national banks and
State banks with respect to interest rate authority. The OCC has taken
the position that national banks' authority to charge interest at the
rate established by section 85 includes the authority to assign the
loan to another party at the contractual interest rate.\41\ To the
extent assignees of national banks' loans may enforce the contractual
interest-rate terms of such loans, the FDIC seeks to reaffirm similar
authority for State banks' assignees.
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\41\ See Brief for United States as amicus curiae, Midland
Funding, LLC v. Madden (No. 15-610), at 6.
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Finally, the regulations also implement section 24(j) (12 U.S.C.
1831a(j)) to provide that the laws of a State in which a State bank is
not chartered in but in which it maintains a branch (host State), shall
apply to any branch in the host State of an out-of-State State bank to
the same extent as such State laws apply to a branch in the host State
of an out-of-State national bank.
The FDIC has the authority to issue rules generally to carry out
the provisions of the FDI Act.\42\ In addition, section 10(g) of the
FDI Act, 12 U.S.C. 1820(g), provides the FDIC authority to prescribe
regulations carrying out the FDI Act, and to define terms as necessary
to carry out the FDI Act, except to the extent such authority is
conferred on another Federal banking agency. No other agency has been
granted the authority to issue rules to restate, implement, clarify, or
otherwise carry out, either section 24(j) or section 27 of the FDI Act.
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\42\ ``[T]he Corporation . . . shall have power . . . . To
prescribe by its Board of Directors such rules and regulations as it
may deem necessary to carry out the provisions of this Act or of any
other law which it has the responsibility of administering or
enforcing (except to the extent that authority to issue such rules
and regulations has been expressly and exclusively granted to any
other regulatory agency).'' 12 U.S.C. 1819(a)(Tenth).
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III. Description of the Proposed Rule
A. Application of Host State Law
Section 331.3 of the proposed rule implements section 24(j)(1) of
the FDI Act, which establishes parity between State banks and national
banks regarding the application of State law to interstate branches. If
a State bank maintains a branch in a State other than its home State,
the bank is an out-of-State State bank with respect to that State,
which is designated the host State. A State bank's home State is
defined as the State that chartered the Bank, and a host State is
another State in which that bank maintains a branch. These definitions
correspond with statutory definitions of these terms used by section
24(j).\43\ Consistent with section 24(j)(1), the proposed rule provides
that the laws of a host State apply to a branch of an out-of-State
State bank only to the extent such laws apply to a branch of an out-of-
State national bank in the host State. Thus, to the extent that host
State law is preempted for out-of-State national banks, it is also
preempted with respect to out-of-State State banks.
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\43\ Section 24(j)(4) references definitions in section 44(f) of
the FDI Act; however, the Gramm-Leach-Bliley Act redesignated
section 44(f) as section 44(g) without updating this reference. The
relevant definitions are currently found in section 44(g), 12 U.S.C.
1831u(g).
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B. Interest Rate Authority
Section 331.4 of the proposed rule implements section 27 of the FDI
Act, which provides parity between State banks and national banks
regarding the applicability of State law interest-rate restrictions.
Paragraph (a) corresponds with section 27(a) of the statute, and
provides that a State bank or insured branch of a foreign bank may
charge interest of up to the greater of: 1 percent more than the rate
on ninety-day commercial paper; or the rate allowed by the law of the
State where the bank is located. Where a State constitutional provision
or statute prohibits a State bank or insured branch of a foreign bank
from charging interest at the greater of these two rates, the State
constitutional provision or statute is expressly preempted by section
27.
In some instances, State law may provide different interest-rate
restrictions for specific classes of institutions and loans. Paragraph
(b) clarifies the applicability of such restrictions to State banks and
insured branches of foreign banks. State banks and insured branches of
foreign banks located in a State are permitted to charge interest at
the maximum rate permitted to any State-chartered or licensed lending
institution by the law of that State. Further, a State bank or insured
branch of a foreign bank is subject only to the provisions of State law
relating to the class of loans that are material to the determination
of the permitted interest rate. For example, assume that a State's laws
allow small State-chartered loan companies to charge interest at
specific rates, and impose size limitations on such loans. State banks
or insured branches of foreign banks located in that State could charge
interest at the rate permitted for small State-chartered loan companies
without being so licensed. However, in making loans for which that
interest rate is permitted, State banks and insured branches of foreign
banks would be subject to loan size limitations applicable to small
State-chartered loan companies under that State's law. This provision
of the proposed rule is intended to maintain parity between State banks
and national banks, and corresponds with the authority provided
[[Page 66850]]
to national banks under the OCC's regulations at 12 CFR 7.4001(b).
Paragraph (c) of section 331.4 clarifies the effect of the proposed
rule's definition of the term interest for purposes of State law.
Importantly, the proposed rule's definition of interest would not
change how interest is defined by the State or how the State's
definition of interest is used solely for purposes of State law. For
example, if late fees are not interest under State law where a State
bank is located but State law permits its most favored lender to charge
late fees, then a State bank located in that State may charge late fees
to its intrastate customers. The State bank also may charge late fees
to its interstate customers because the fees are interest under the
Federal definition of interest and an allowable charge under State law
where the State bank is located. However, the late fees would not be
treated as interest for purposes of evaluating compliance with State
usury limitations because State law excludes late fees when calculating
the maximum interest that lending institutions may charge under those
limitations. This provision of the proposed rule corresponds to a
similar provision in the OCC's regulations, 12 CFR 7.4001(c).
Paragraph (d) of proposed section 331.4 clarifies the authority of
State banks and insured branches of foreign banks to charge interest to
corporate borrowers. If the law of the State in which the State bank or
insured branch of a foreign bank is located denies the defense of usury
to corporate borrowers, then the State bank or insured branch would be
permitted to charge any rate of interest agreed upon by a corporate
borrower. This provision is also intended to maintain parity between
State banks and national banks, and corresponds to authority provided
to national banks under the OCC's regulations, at 12 CFR 7.4001(d).
Paragraph (e) clarifies that the determination of whether interest
on a loan is permissible under section 27 of the FDI Act is made at the
time the loan is made. This paragraph further clarifies that the
permissibility under section 27 of interest on a loan shall not be
affected by subsequent events, such as a change in State law, a change
in the relevant commercial paper rate, or the sale, assignment, or
other transfer of the loan. An assignee can enforce the loan's
interest-rate terms to the same extent as the assignor. Paragraph (e)
is not intended to affect the application of State law in determining
whether a State bank or insured branch of a foreign bank is a real
party in interest with respect to a loan or has an economic interest in
a loan. The FDIC views unfavorably a State bank's partnership with a
non-bank entity for the sole purpose of evading a lower interest rate
established under the law of the entity's licensing State(s).
IV. Expected Effects
The proposed rule is intended to address uncertainty regarding the
applicability of State law interest rate restrictions to State banks
and other market participants. The proposed rule would reaffirm the
ability of State banks to sell and securitize loans they originate.
Therefore, as described in more detail below, the proposed rule should
mitigate the potential for future disruption to the markets for loan
sales and securitizations and a resulting contraction in availability
of consumer credit.
The FDIC is not aware of any widespread or significant negative
effects on credit availability or securitization markets having
occurred to this point as a result of the Madden decision. Thus, to the
extent the proposed rule contributes to a return to the pre-Madden
status quo regarding market participants' understanding of the
applicability of State usury laws, immediate widespread effects on
credit availability would not be expected. Beneficial effects on
availability of consumer credit and securitization markets would fall
into two categories. First, the rule would mitigate the possibility
that State banks' ability to sell loans might be impaired in the
future. Second, the rule could have immediate effects on certain types
of loans and business models in the Second Circuit that may have been
directly affected by the Madden decision.
With regard to these two types of benefits, the Madden decision
created significant uncertainty in the minds of market participants
about banks' future ability to sell loans. For example, one commentator
stated, ``[T]he impact on depository institutions will be significant
even if the application of the Madden decision is limited to third
parties that purchase charged off debts. Depository institutions will
likely see a reduction in their ability to sell loans originated in the
Second Circuit due to significant pricing adjustments in the secondary
market.'' \44\ Such uncertainty has the potential to chill State banks'
willingness to make the types of loans affected by the proposed rule.
By reducing such uncertainty, the proposed rule should mitigate the
potential for future reductions in the availability of credit.
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\44\ ``Madden v. Midland Funding: A Sea Change in Secondary
Lending Markets,'' Robert Savoie, McGlinchey Stafford PLLC, p. 3.
---------------------------------------------------------------------------
More specifically, some researchers have focused attention on the
impact of the decision on so-called marketplace lenders. Since
marketplace lending frequently involves a partnership in which a bank
originates and immediately sells loans to a nonbank partner, any
question about the nonbank's ability to enforce the contractual
interest rate could adversely affect the viability of that business
model. Thus, for example, regarding the Supreme Court's decision not to
hear the appeal of the Madden decision, Moody's wrote: ``The denial of
the appeal is generally credit negative for marketplace loans and
related asset-backed securities (ABS), because it will extend the
uncertainty over whether state usury laws apply to consumer loans
facilitated by lending platforms that use a partner bank origination
model.'' \45\ In a related vein, some researchers have stated that
marketplace lenders in the affected States did not grow their loans as
fast in these states as they did in other States, and that there were
pronounced reductions of credit to higher risk borrowers.\46\
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\45\ Moody's Investors Service, ``Uncertainty Lingers as Supreme
Court Declines to Hear Madden Case'' (Jun. 29, 2016).
\46\ See Colleen Honigsberg, Robert Jackson and Richard Squire,
``How Does Legal Enforceability Affect Consumer lending? Evidence
from a Natural Experiment,'' Journal of Law and Economics, vol. 60
(November 2017); and Piotr Danisewicz and Ilaf Elard, ``The Real
Effects of Financial Technology: Marketplace Lending and Personal
Bankruptcy'' (July 5, 2018). Available at http://ssrn.com/abstract=3209808 or http://dx.doi.org/10.2139/ssrn.3208908.
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Particularly in jurisdictions affected by Madden, to the extent the
proposed rule results in the preemption of State usury laws, some
consumers may benefit from the improved availability of credit from
State banks. For these consumers, this additional credit may be offered
at a higher interest rate than otherwise provided by relevant State
law. However, in the absence of the proposed rule, these consumers
might be unable to obtain credit from State banks and might instead
borrow at higher interest rates from less-regulated lenders.
The FDIC also believes that an important benefit of the proposed
rule is to uphold longstanding principles regarding the ability of
banks to sell loans, an ability that has important safety-and-soundness
benefits. By reaffirming the ability of State banks to assign loans at
the contractual interest rate, the proposed rule should make State
banks' loans more marketable, enhancing State banks' ability to
[[Page 66851]]
maintain adequate capital and liquidity levels. Avoiding disruption in
the market for loans is a safety and soundness issue, as affected State
banks would maintain the ability to sell loans they originate in order
to properly maintain liquidity. Additionally, securitizing or selling
loans gives State banks flexibility to comply with risk-based capital
requirements.
Similarly, the proposed rule is expected to preserve State banks'
ability to manage their liquidity. This is important for a number of
reasons. For example, the ability to sell loans allows State banks to
increase their liquidity in a crisis, to meet unusual deposit
withdrawal demands, or to pay unexpected debts. The practice is useful
for many State banks, including those that prefer to hold loans to
maturity. Any State bank could be faced with an unexpected need to pay
large debts or deposit withdrawals, and the ability to sell or
securitize loans is a useful tool in such circumstances.
Finally, the proposed rule would support State banks' ability to
use loan sales and securitization to diversify their funding sources
and address interest-rate risk. The market for loan sales and
securitization is a lower-cost source of funding for State banks, and
the proposed rule would support State banks' access to this market.
V. Request for Comment
The FDIC is inviting comment on all aspects of the proposed rule.
VI. Regulatory Analysis
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) generally requires an agency,
in connection with a proposed rule, to prepare and make available for
public comment an initial regulatory flexibility analysis that
describes the impact of a proposed rule on small entities.\47\ However,
an initial regulatory flexibility analysis is not required if the
agency certifies that the rule will not have a significant economic
impact on a substantial number of small entities.\48\ The Small
Business Administration (SBA) has defined ``small entities'' to include
banking organizations with total assets of less than or equal to $600
million.\49\
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\47\ 5 U.S.C. 601 et seq.
\48\ 5 U.S.C. 605(b).
\49\ The SBA defines a small banking organization as having $600
million or less in assets, where an organization's ``assets are
determined by averaging the assets reported on its four quarterly
financial statements for the preceding year.'' See 13 CFR 121.201
(as amended, effective August 19, 2019). In its determination, the
SBA ``counts the receipts, employees, or other measure of size of
the concern whose size is at issue and all of its domestic and
foreign affiliates.'' 13 CFR 121.103. Following these regulations,
the FDIC uses a covered entity's affiliated and acquired assets,
averaged over the preceding four quarters, to determine whether the
covered entity is ``small'' for the purposes of RFA.
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Generally, the FDIC considers a significant effect to be a
quantified effect in excess of 5 percent of total annual salaries and
benefits per institution, or 2.5 percent of total non-interest
expenses. The FDIC believes that effects in excess of these thresholds
typically represent significant effects for FDIC-supervised
institutions. The FDIC has considered the potential impact of the
proposed rule on small entities in accordance with the RFA. Based on
its analysis and for the reasons stated below, the FDIC believes that
this proposed rule will not have a significant economic impact on a
substantial number of small entities. Nevertheless, the FDIC is
presenting and inviting comment on this initial regulatory flexibility
analysis.
Reasons Why This Action Is Being Considered
The Second Circuit's decision in Madden v. Midland Funding has
created uncertainty as to the ability of an assignee to enforce the
interest rate provisions of a loan originated by a bank. Madden held
that, under the facts presented in that case, nonbank debt collectors
who purchase debt \50\ from national banks are subject to usury laws of
the debtor's State \51\ and do not inherit the preemption protection
vested in the assignor national bank because such State usury laws do
not ``significantly interfere with a national bank's ability to
exercise its power under the [National Bank Act].'' \52\ The court's
decision created uncertainty and a lack of uniformity in secondary
credit markets. For additional discussion of the reasons why this
rulemaking is being proposed please refer to SUPPLEMENTARY INFORMATION
Section II.F in this Federal Register Notice entitled ``Need for
Rulemaking and Rulemaking Authority.''
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\50\ In Madden, the relevant debt was a consumer debt (credit
card) account.
\51\ A violation of New York's usury laws also subjected the
debt collector to potential liability imposed under the Fair Debt
Collection Practices Act, 15 U.S.C. 1692e, 1692f.
\52\ Madden, 786 F.3d at 251 (referencing Barnett Bank of Marion
City, N.A. v. Nelson, 517 U.S. 25, 33 (1996); Pac. Capital Bank, 542
F.3d at 533).
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Objectives and Legal Basis
The policy objective of the proposed rule is to eliminate
uncertainty regarding the enforceability of loans originated and sold
by State banks. The FDIC is proposing regulations that would implement
sections 24(j) and 27 of the FDI Act. For additional discussion of the
objectives and legal basis of the proposed rule please refer to the
SUPPLEMENTARY INFORMATION sections I and II entitled ``Policy
Objectives'' and ``Background: Current Regulatory Approach and Market
Environment,'' respectively.
Number of Small Entities Affected
As of June 30, 2019, there were 4,206 State-chartered FDIC-insured
depository institutions, of which 3,171 have been identified as ``small
entities'' in accordance with the RFA.\53\ All 3,171 small State-
chartered FDIC-insured depository institutions are covered by the
proposed rule and therefore, could be affected. However, only 48 small
State-chartered FDIC-insured depository institutions are chartered in
States within the Second Circuit (New York, Connecticut and Vermont)
and therefore, may have been directly affected by ambiguities about the
practical implications of the Madden decision. Moreover, only
institutions actively engaged in, or considering making loans for which
the contractual interest rates could exceed State usury limits, would
be affected by the proposed rule. Small State-chartered FDIC-insured
depository institutions that are chartered in States outside the Second
Circuit, but that have made loans to borrowers who reside in New York,
Connecticut and Vermont also may be directly affected, but only to the
extent they are engaged in or considering making loans for which
contractual interest rates could exceed State usury limits. It is
difficult to estimate the number of small entities that have been
directly affected by ambiguity resulting from Madden and would be
affected by the proposed rule without complete and up-to-date
information on the contractual terms of loans and leases held by small
State-chartered FDIC-insured depository institutions, as well as
present and future plans to sell or transfer assets. The FDIC does not
have this information.
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\53\ FDIC Call Report Data, June 30th, 2019.
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Expected Effects
The proposed rule clarifies that the determination of whether
interest on a loan is permissible under section 27 of the FDI Act is
made when the loan is made, and that the permissibility of interest
under section 27 is not affected by subsequent events such as changes
in State law or assignment of the loan. As described below, this would
be expected to increase some small State
[[Page 66852]]
banks' willingness to make loans with contractual interest rates that
could exceed limits prescribed by State usury laws, either at inception
or contingent on loan performance.
The FDIC is not aware of any broad effects on credit availability
having occurred as a result of Madden. Thus, to the extent the proposed
rule contributes to a return to the pre-Madden status quo, broad
effects on credit availability are not expected. It is plausible,
however, that Madden could have discouraged the origination and sale of
loan products whose contractual interest rates could potentially exceed
State usury limits by small State-chartered institutions in the Second
Circuit. The proposed rule could increase the availability of such
loans from State banks, but the FDIC believes the number of
institutions materially engaged in making loans of this type to be
small.
The small State-chartered institutions that are affected would
benefit from the ability to sell such loans while assigning to the
buyer the right to enforce the contractual loan interest rate. Without
the ability to assign the right to enforce the contractual interest
rate, the sale value of such loans would be substantially diminished.
The proposed rule is unlikely to pose any new reporting, recordkeeping,
or other compliance requirements for small, FDIC-supervised
institutions.
Duplicative, Overlapping, or Conflicting Federal Regulations
The FDIC has not identified any Federal statutes or regulations
that would duplicate, overlap, or conflict with the proposed revisions.
Discussion of Significant Alternatives
The FDIC believes the proposed amendments will not have a
significant economic impact on a substantial number of small FDIC-
supervised banking entities and therefore believes that there are no
significant alternatives to the proposal that would reduce the economic
impact on small FDIC-supervised banking entities.
The FDIC invites comments on all aspects of the supporting
information provided in this section, and in particular, whether the
proposed rule would have any significant effects on small entities that
the FDIC has not identified.
B. Riegle Community Development and Regulatory Improvement Act
Section 302 of the Riegle Community Development and Regulatory
Improvement Act (RCDRIA) requires that the Federal banking agencies,
including the FDIC, in determining the effective date and
administrative compliance requirements of new regulations that impose
additional reporting, disclosure, or other requirements on insured
depository institutions, consider, consistent with principles of safety
and soundness and the public interest, any administrative burdens that
such regulations would place on depository institutions, including
small depository institutions, and customers of depository
institutions, as well as the benefits of such regulations.\54\ Subject
to certain exceptions, new regulations and amendments to regulations
prescribed by a Federal banking agency which impose additional
reporting, disclosures, or other new requirements on insured depository
institutions shall take effect on the first day of a calendar quarter
which begins on or after the date on which the regulations are
published in final form.\55\
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\54\ 12 U.S.C. 4802(a).
\55\ 12 U.S.C. 4802(b).
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The proposed rule would not impose additional reporting or
disclosure requirements on insured depository institutions, including
small depository institutions, or on the customers of depository
institutions. Accordingly, section 302 of RCDRIA does not apply.
Nevertheless, the requirements of RCDRIA will be considered as part of
the overall rulemaking process, and the FDIC invites comments that will
further inform its consideration of RCDRIA.
C. Paperwork Reduction Act
In accordance with the requirements of the Paperwork Reduction Act
of 1995 (PRA), 44 U.S.C. 3501-3521, the FDIC may not conduct or
sponsor, and the respondent is not required to respond to, an
information collection unless it displays a currently valid Office of
Management and Budget (OMB) control number. The proposed rule would not
require any information collections for purposes of the PRA, and
therefore, no submission to OMB is required.
D. The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families
The FDIC has determined that the proposed rule will not affect
family well-being within the meaning of section 654 of the Treasury and
General Government Appropriations Act, enacted as part of the Omnibus
Consolidated and Emergency Supplemental Appropriations Act of 1999.\56\
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\56\ Public Law 105-277, 112 Stat. 2681.
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E. Plain Language
Section 722 of the Gramm-Leach-Bliley Act \57\ requires the Federal
banking agencies to use plain language in all proposed and final
rulemakings published in the Federal Register after January 1, 2000.
The FDIC invites your comments on how to make this proposal easier to
understand. For example:
---------------------------------------------------------------------------
\57\ Public Law 106-102, 113 Stat. 1338, 1471.
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Has the FDIC organized the material to suit your needs? If
not, how could the material be better organized?
Are the requirements in the proposed regulation clearly
stated? If not, how could the regulation be stated more clearly?
Does the proposed regulation contain language or jargon
that is unclear? If so, which language requires clarification?
Would a different format (grouping and order of sections,
use of headings, paragraphing) make the regulation easier to
understand?
List of Subjects in 12 CFR Part 331
Banks, Banking, Deposits, Foreign banking, Interest rates.
Authority and Issuance
0
For the reasons stated above, the Board of Directors of the Federal
Deposit Insurance Corporation proposes to amend title 12 of the Code of
Federal Regulations by adding part 331 to read as follows:
PART 331--FEDERAL INTEREST RATE AUTHORITY
Sec.
331.1 Authority, purpose, and scope.
331.2 Definitions.
331.3 Application of host state law.
331.4 Interest rate authority.
Authority: 12 U.S.C. 1819(a)(Tenth), 1820(g), 1831d.
Sec. [thinsp]331.1 Authority, purpose, and scope.
(a) Authority. The regulations in this part are issued by the FDIC
under sections 9(a)(Tenth) and 10(g) of the Federal Deposit Insurance
Act (``FDI Act''), 12 U.S.C. 1819(a)(Tenth), 1820(g), to implement
sections 24(j) and 27 of the FDI Act, 12 U.S.C. 1831a(j), 1831d, and
related provisions of the Depository Institutions Deregulation and
Monetary Control Act of 1980, Public Law 96-221, 94 Stat. 132 (1980).
(b) Purpose. Section 24(j) of the FDI Act, as amended by the
Riegle-Neal Amendments Act of 1997, Public Law 105-24, 111 Stat. 238
(1997), was enacted to maintain parity between State banks and national
banks regarding the application of a host
[[Page 66853]]
State's laws to branches of out-of-State banks. Section 27 of the FDI
Act was enacted to provide State banks with interest rate authority
similar to that provided to national banks under the National Bank Act,
12 U.S.C. 85. The regulations in this part clarify that State-chartered
banks and insured branches of foreign banks have regulatory authority
in these areas parallel to the authority of national banks under
regulations issued by the Office of the Comptroller of the Currency,
and address other issues the FDIC considers appropriate to implement
these statutes.
(c) Scope. The regulations in this part apply to State-chartered
banks and insured branches of foreign banks.
Sec. 331.2 Definitions.
For purposes of this part--
Home state means, with respect to a State bank, the State by which
the bank is chartered.
Host state means a State, other than the home State of a State
bank, in which the State bank maintains a branch.
Insured branch has the same meaning as that term in section 3 of
the Federal Deposit Insurance Act, 12 U.S.C. 1813.
Interest means any payment compensating a creditor or prospective
creditor for an extension of credit, making available a line of credit,
or any default or breach by a borrower of a condition upon which credit
was extended. Interest includes, among other things, the following fees
connected with credit extension or availability: Numerical periodic
rates; late fees; creditor-imposed not sufficient funds (NSF) fees
charged when a borrower tenders payment on a debt with a check drawn on
insufficient funds; overlimit fees; annual fees; cash advance fees; and
membership fees. It does not ordinarily include appraisal fees,
premiums and commissions attributable to insurance guaranteeing
repayment of any extension of credit, finders' fees, fees for document
preparation or notarization, or fees incurred to obtain credit reports.
Out-of-state state bank means, with respect to any State, a State
bank whose home State is another State.
Rate on ninety-day commercial paper means the rate quoted by the
Federal Reserve Board of Governors for ninety-day A2/P2 nonfinancial
commercial paper.
State bank has the same meaning as that term in section 3 of the
Federal Deposit Insurance Act, 12 U.S.C. 1813.
Sec. 331.3 Application of host state law.
The laws of a host State shall apply to any branch in the host
State of an out-of-State State bank to the same extent as such State
laws apply to a branch in the host State of an out-of-State national
bank. To the extent host State law is inapplicable to a branch of an
out-of-State State bank in such host State pursuant to the preceding
sentence, home State law shall apply to such branch.
Sec. [thinsp]331.4 Interest rate authority.
(a) Interest rates. In order to prevent discrimination against
State-chartered depository institutions, including insured savings
banks, or insured branches of foreign banks, if the applicable rate
prescribed in this section exceeds the rate such State bank or insured
branch of a foreign bank would be permitted to charge in the absence of
this paragraph, such State bank or insured branch of a foreign bank
may, notwithstanding any State constitution or statute which is
preempted by section 27 of the Federal Deposit Insurance Act, 12 U.S.C.
1831d, take, receive, reserve, and charge on any loan or discount made,
or upon any note, bill of exchange, or other evidence of debt, interest
at a rate of not more than 1 percent in excess of the rate on ninety-
day commercial paper or at the rate allowed by the laws of the State,
territory, or district where the bank is located, whichever may be
greater.
(b) Classes of institutions and loans. A State bank or insured
branch of a foreign bank located in a State may charge interest at the
maximum rate permitted to any State-chartered or licensed lending
institution by the law of that State. If State law permits different
interest charges on specified classes of loans, a State bank or insured
branch of a foreign bank making such loans is subject only to the
provisions of State law relating to that class of loans that are
material to the determination of the permitted interest. For example, a
State bank may lawfully charge the highest rate permitted to be charged
by a State-licensed small loan company, without being so licensed, but
subject to State law limitations on the size of loans made by small
loan companies.
(c) Effect on state law definitions of interest. The definition of
the term interest in this part does not change how interest is defined
by the individual States or how the State definition of interest is
used solely for purposes of State law. For example, if late fees are
not interest under the State law of the State where a State bank is
located but State law permits its most favored lender to charge late
fees, then a State bank located in that State may charge late fees to
its intrastate customers. The State bank also may charge late fees to
its interstate customers because the fees are interest under the
Federal definition of interest and an allowable charge under the State
law of the State where the bank is located. However, the late fees
would not be treated as interest for purposes of evaluating compliance
with State usury limitations because State law excludes late fees when
calculating the maximum interest that lending institutions may charge
under those limitations.
(d) Corporate borrowers. A State bank or insured branch of a
foreign bank located in a State whose State law denies the defense of
usury to a corporate borrower may charge a corporate borrower any rate
of interest agreed upon by the corporate borrower.
(e) Determination of interest permissible under section 27. Whether
interest on a loan is permissible under section 27 of the Federal
Deposit Insurance Act is determined as of the date the loan was made.
The permissibility under section 27 of the Federal Deposit Insurance
Act of interest on a loan shall not be affected by any subsequent
events, including a change in State law, a change in the relevant
commercial paper rate after the loan was made, or the sale, assignment,
or other transfer of the loan.
Federal Deposit Insurance Corporation.
By order of the Board of Directors.
Dated at Washington, DC, on November 19, 2019.
Annmarie H. Boyd,
Assistant Executive Secretary.
[FR Doc. 2019-25689 Filed 12-5-19; 8:45 am]
BILLING CODE 6714-01-P