[Federal Register Volume 85, Number 141 (Wednesday, July 22, 2020)]
[Rules and Regulations]
[Pages 44146-44158]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-14114]


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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 331

RIN 3064-AF21


Federal Interest Rate Authority

AGENCY: Federal Deposit Insurance Corporation.

ACTION: Final rule.

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SUMMARY: The Federal Deposit Insurance Corporation (FDIC) is issuing 
regulations clarifying the law that governs the interest rates State-
chartered banks and insured branches of foreign banks (collectively, 
State banks) may charge. These regulations 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 90-day 
commercial paper rate, whichever is greater. The regulations also 
provide that whether interest on a loan is permissible under section 27 
of the Federal Deposit Insurance Act is determined at the time the loan 
is made, and interest on a loan permissible under section 27 is not 
affected by a change in State law, a change in the relevant commercial 
paper rate, or the sale, assignment, or other transfer of the loan.

DATES: The rule is effective on August 21, 2020.

FOR FURTHER INFORMATION CONTACT: James Watts, Counsel, Legal Division, 
(202) 898-6678, [email protected]; Catherine Topping, Counsel, Legal 
Division, (202) 898-3975, [email protected].

SUPPLEMENTARY INFORMATION:

I. Objectives

    Section 27 of the Federal Deposit Insurance Act (FDI Act) (12 
U.S.C. 1831d) authorizes State banks to make loans charging interest at 
the maximum rate permitted by the State where the bank is located, or 
at one percent in excess of the 90-day commercial paper rate, whichever 
is greater. Section 27 does not state at what point in time the 
validity of the interest rate should be determined to assess whether a 
State bank is taking or receiving interest in accordance 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. To fill this statutory gap and 
carry out the purpose of section 27, the FDIC proposed regulations \1\ 
in November 2019 that would provide that the permissibility of interest 
under section 27 must be determined when the loan is made, and shall 
not be affected by a change in State law, a change in the relevant 
commercial paper rate, or the sale, assignment, or other transfer of 
the loan. 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.
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    \1\ 84 FR 66845 (Dec. 6, 2019).
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    A second statutory gap is also present because section 27 expressly 
gives banks the right to make loans at the rates permitted by their 
home States, but does not explicitly list all the components of that 
right. One such implicit component is the right to assign the loans 
under the preemptive authority of section 27. Banks' power to make 
loans has been traditionally viewed as carrying with it the power to 
assign loans. Thus, a State bank's Federal statutory authority under 
section 27 to make loans at particular rates includes the power to 
assign the loans at those rates. To eliminate ambiguity, the proposed 
regulation makes this implicit understanding explicit. By providing 
that the permissibility of interest under section 27 must be determined 
when the loan is made, and shall not be affected by the sale, 
assignment, or other transfer of the loan, the regulation clarifies 
that banks can transfer enforceable rights in the loans they made under 
the preemptive authority of section 27.
    The FDIC believes that safety and soundness concerns also support 
clarification of the application of section 27 to State banks' loans, 
because the statutory ambiguity exposes State banks to increased risk 
in the event they need to sell their loans to satisfy their liquidity 
needs in a crisis. Left unaddressed, the two statutory gaps could 
create legal uncertainty for State banks and confusion for the courts. 
One example of the concerns with leaving the statutory ambiguity 
unaddressed is the recent decision of the U.S. Court of Appeals for the 
Second Circuit in Madden v. Midland Funding, LLC.\2\ Reading the text 
of the statute in isolation, the Madden 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--does not allow national banks to transfer enforceable 
rights in the loans they made under the preemptive authority of section 
85. 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. Madden therefore helped highlight the need 
to issue clarifying regulations addressing the legal ambiguity in 
section 27.\3\
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    \2\ 786 F.3d 246 (2d Cir. 2015).
    \3\ 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 (https://home.treasury.gov/sites/default/files/2018-07/A-Financial-System-that-Creates-Economic-Opportunities---Nonbank-Financi....pdf).
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    As described in more detail below, the FDIC received 59 comment 
letters on the proposed rule from interested parties. The FDIC has 
carefully considered these comments and is now issuing a final rule. 
The final rule implements the Federal statutory provisions that 
authorize State banks to charge interest of up to the greater of: one 
percent more than the 90-day commercial paper rate; or the rate 
permitted by the State in which the bank is located. The final rule 
also provides that whether interest on a loan is permissible under 
section 27 is determined at the time the loan is made, and interest on 
a loan under section 27 is not affected by 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 (12 U.S.C. 1831a(j)) to provide that the laws of a 
State in which a State bank is not chartered 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 
continues to support the position that it will view

[[Page 44147]]

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).

II. Background: Current Regulatory Approach and Market Environment

A. National Banks' Interest Rate Authority

    The statutory provisions implemented by the final 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 final rule implements the 
FDI Act, rather than section 85, the following background information 
is intended to frame the discussion of the 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\
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    \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 that 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 the subsection 
exceeds the rate such State bank or insured branch of a foreign bank 
would be permitted to charge in the absence of the 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 the 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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    \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).
    \13\ 12 U.S.C. 1831d(a).
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    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 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 D-OMCA,\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, stating explicitly that the State does not want section 
27 to apply with respect to loans made in such State. Iowa and

[[Page 44148]]

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. Colorado, Maine, Massachusetts, North Carolina, Nebraska, 
and Wisconsin have previously opted out of coverage of section 27, 
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), provides, in relevant part, that 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 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 provide that 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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    \23\ Public Law 105-24, 111 Stat. 238 (July 3, 1997).
    \24\ 12 U.S.C. 1831a(j)(1).
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    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

    Sections 24(j) and 27 of the FDI Act 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 
Sec.  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 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. Statutory Gaps in Section 27

    Section 27 does not state at what point in time the validity and 
enforceability under section 27 of the interest-rate term of a bank's 
loan should be determined. 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

[[Page 44149]]

of section 27,\30\ the FDIC concludes that the validity and 
enforceability under section 27 of the interest-rate term of a loan 
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 a 
loan is made, and provides a logical and fair rule that is easy to 
apply.
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    \30\ In 12 U.S.C. 1819(a), Congress gave the FDIC statutory 
authority to prescribe ``such rules and regulations as it may deem 
necessary to carry out the provisions of this chapter,'' namely 
Chapter 16 of Title 12 of the U.S. Code. Section 27, codified at 
Section 1831d of Chapter 16, is a provision of ``this chapter.''
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    A second statutory gap is also present because section 27 expressly 
gives State banks the right to make loans at the rates permitted by 
their home States, but does not explicitly list all the components of 
that right. One such implicit component is the right to assign the 
loans made under the preemptive authority of section 27. State banks' 
power to make loans has been traditionally viewed as implicitly 
carrying with it the power to assign loans.\31\ 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 State banks the ability to transfer enforceable rights in the 
loans they make under the preemptive authority of section 27 would 
undermine the purpose of section 27 and deprive State banks of an 
important and indispensable component of their Federal statutory power 
to make loans at the rates permitted by their home State. State banks' 
ability to transfer enforceable rights in the loans they validly made 
under the preemptive authority of section 27 is also central to the 
stability and liquidity of the domestic loan markets. A lack of 
enforceable rights in the transferred loans' interest rate terms would 
also result in distressed market values for many loans, frustrating the 
purpose of the FDI Act, which would also affect the FDIC as a secondary 
market loan seller. One way the FDIC fulfills its mission to maintain 
stability and public confidence in the nation's financial system is by 
carrying out all of the tasks triggered by the closure of an FDIC-
insured institution. This includes attempting to find a purchaser for 
the institution and the liquidation of the assets held by the failed 
bank. Following a bank closing, the FDIC as conservator or receiver 
(FDIC-R) is often left with large portfolios of loans.
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    \31\ In Planters' Bank v. Sharp, 47 U.S. 301, 323 (1848), a case 
dealing with the powers of a State bank, the Supreme Court held that 
a statute that explicitly gave banks the power to make loans also 
implicitly gave them the power to assign the loans because ``in 
discounting notes and managing its property in legitimate banking 
business . . . [a bank] must be able to assign or sell those notes 
when necessary and proper.''
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    The FDIC-R has a statutory obligation to maximize the net present 
value return from the sale or disposition of such assets and minimize 
the amount of any loss, both to protect the Deposit Insurance Fund 
(DIF).\32\ The DIF would be significantly impacted in a large bank 
failure scenario if the FDIC-R were forced to sell loans at a large 
discount to account for impairment in the value of those loans in a 
distressed secondary market. This uncertainty would also likely reduce 
overall liquidity in loan markets, further limiting the ability of the 
FDIC-R to sell loans. The Madden decision, as it stands, could 
significantly impact the FDIC's statutory obligation to resolve failed 
banks using the least costly resolution option and minimizing losses to 
the DIF.
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    \32\ 12 U.S.C. 1821(d).
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    To eliminate ambiguity and carry out the purpose of section 27, the 
proposed regulation makes explicit that the right to assign loans is a 
component of banks' Federal statutory right to make loans at the rates 
permitted by section 27. The regulation accomplishes this by providing 
that the validity and enforceability of the interest rate term of a 
loan under section 27 is determined at the inception of the loan, and 
subsequent events such as an assignment do not affect the validity or 
enforceability of the loan.
    The FDIC's proposal, addressing the two statutory gaps in section 
27 in a manner that carries out the goals of the Federal statute, is 
based on Federal law. Specifically, the rule is based on the meaning of 
the text of the statute, interpreted in light of the statute's purpose 
and the FDIC's regulatory experience. It is, however, also consistent 
with state banking powers and common law doctrines such as the ``valid 
when made'' and ``stand-in-the-shoes'' rules. The ``valid when made'' 
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.\33\ The banks' ability 
to transfer enforceable rights in the loans they make 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.\34\ 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.\35\ 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. A loan that was not usurious under section 27 when 
made would thus not become usurious upon assignment.
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    \33\ 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) (``the 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.'').
    \34\ 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'').
    \35\ 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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    The FDIC's interpretation of section 27 is also 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.'' \36\ Similarly,

[[Page 44150]]

the National Bank Act authorizes national banks to sell or transfer 
loan contracts by allowing ``negotiating'' (i.e., transfer) of 
``promissory notes, drafts, bills of exchange, and other evidences of 
debt.'' \37\
---------------------------------------------------------------------------

    \36\ 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''). 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.
    \37\ 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.
---------------------------------------------------------------------------

F. Proposed Rule

    On December 6, 2019, the FDIC published a notice of proposed 
rulemaking (NPR) to issue regulations implementing sections 24(j) and 
27. Through the proposed regulations, the FDIC sought to clarify the 
application of section 27 and reaffirm State banks' ability to assign 
enforceable rights in the loans they made under the preemptive 
authority of Section 27. The proposed regulations also were intended 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.\38\ Finally, the proposed regulations also 
would 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.
---------------------------------------------------------------------------

    \38\ See 85 FR 33530, 33531 (June 2, 2020).
---------------------------------------------------------------------------

    The comment period for the NPR ended on February 4, 2020. The FDIC 
received a total of 59 comment letters from a variety of individuals 
and entities, including trade associations, insured depository 
institutions, consumer and public interest groups, state banking 
regulators and state officials, a city treasurer, non-bank lenders, law 
firms, members of Congress, academics, and think tanks. In developing 
the final rule, the FDIC carefully considered all of the comments that 
it received in response to the NPR.

III. Discussion of Comments

    In general, the comments submitted by financial services trade 
associations, depository institutions, and non-bank lenders expressed 
support for the proposed rule. These commenters stated that the 
proposed rule would: address legal uncertainty created by the Madden 
decision; reaffirm longstanding views regarding the enforceability of 
interest rate terms on loans that are sold, transferred, or otherwise 
assigned; and reaffirm state banks' ability to engage in activities 
such as securitizations, loan sales, and sales of participation 
interests in loans, that are crucial to the safety and soundness of 
these banks' operations. By reaffirming state banks' ability to sell 
loans, these commenters argued, the proposed rule would ensure that 
banks have the capacity to continue lending to their customers, 
including small businesses, a function that is critical to supporting 
the nation's economy. In addition, these commenters asserted that the 
proposed rule would promote the availability of credit for higher-risk 
borrowers.
    Comments submitted by consumer advocates were generally critical of 
the proposed rule. These comments stated that the proposed rule would 
allow predatory non-bank lenders to evade State law interest rate caps 
through partnerships with State banks, and the FDIC lacks the authority 
to regulate the interest rates charged by non-bank lenders. Commenters 
further asserted that regulation of interest rate limits has 
historically been a State function, and the FDIC seeks to change that 
by claiming that non-banks that buy loans from banks should be able to 
charge interest rates exceeding those provided by State law. These 
commenters also argued that the proposed rule was unnecessary, 
asserting that there is no shortage of credit available to consumers 
and no evidence demonstrating that loan sales are necessary to support 
banks' liquidity.
    In addition to these general themes, commenters raised a number of 
specific concerns with respect to the FDIC's proposed rule. These 
issues are discussed in further detail below.

A. Statutory Authority for the Proposed Rule

    Some commenters asserted that the proposed rule exceeds the FDIC's 
authority under section 27 by regulating non-banks or establishing 
permissible interest rates for non-banks. The FDIC would not regulate 
non-banks through the proposed rule; rather, the proposed rule would 
clarify the application of section 27 to State banks' loans. The 
proposed rule provides that the permissibility of interest on a loan 
under section 27 would be determined as of the date the loan was made. 
As the FDIC explained in the NPR, this interpretation of section 27 is 
necessary to establish a workable rule to determine the timing of 
compliance with the statute.\39\ This rule would apply to loans made by 
State banks, regardless of whether such loans are subsequently assigned 
to another bank or to a non-bank. To the extent a non-bank that 
obtained a State bank's loan would be permitted to charge the 
contractual interest rate, that is because 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. The 
regulation would not become a regulation of assignees simply because it 
would have an indirect effect on assignees.\40\
---------------------------------------------------------------------------

    \39\ See 84 FR 66848.
    \40\ See FERC v. Elec. Power Supply Ass'n, 136 S. Ct. 760, 776 
(2016) (where Federal statute limited agency jurisdiction to the 
wholesale market and reserved regulatory authority over retail sales 
to the States, a regulation directed at wholesale transactions was 
not outside the agency's authority and did not overstep on the 
States' authority, even if the regulation had substantial indirect 
effects on retail transactions).
---------------------------------------------------------------------------

    Some commenters argued that the FDIC lacks authority to prescribe 
the effect of the assignment of a State bank loan made under the 
preemptive authority of section 27 because the statutory provision does 
not expressly refer to the ``assignment'' of a State bank's loan. The 
statute's silence, however, reinforces the FDIC's authority to issue 
interpreting regulations to clarify an aspect of the statute that 
Congress left open. Agencies are permitted to issue regulations filling 
statutory gaps and routinely do so.\41\ The FDIC used its banking 
expertise to fill the gaps in section 27, and its interpretation is 
grounded in the terms and purpose of the statute, read within their 
proper historical and legal context. The power to assign loans has been 
traditionally understood as a component of the power to make loans. 
Thus, the power to make loans at the interest rate permitted by section 
27 implicitly includes the power to assign loans at those interest 
rates. For example, the Supreme Court held that a state banking

[[Page 44151]]

charter statute providing the power to make loans (as section 27 does 
here) also confers the power to assign them, even if the power to 
assign is not explicitly granted in the statute.\42\ The California 
Supreme Court reached a similar conclusion.\43\ Viewing the power to 
assign as an indispensable component of the power to make loans under 
section 27 would also carry out the purpose of the statute. The power 
to assign is indispensable in modern commercial transactions, and even 
more so in banking: State banks need the ability to sell loans in order 
to properly maintain their capital and liquidity. As the Supreme Court 
explained, ``in managing its property in legitimate banking business, 
[a bank] must be able to assign or sell those notes when necessary and 
proper, as, for instance, to procure more [liquidity] in an emergency, 
or return an unusual amount of deposits withdrawn, or pay large 
debts.'' \44\ Absent the power to assign loans made under section 27, 
reliance on the statute could ultimately hurt State banks (instead of 
benefiting them) should they later face a liquidity crisis or other 
financial stresses. The FDIC's interpretation of the statute helps to 
prevent such unintended results.
---------------------------------------------------------------------------

    \41\ See Chevron v. Natural Resources Defense Council, Inc., 467 
U.S. 837, 843 (1984) (agencies have authority to make rules to 
``fill any [statutory] gap left, implicitly or explicitly, by 
Congress'').
    \42\ Planters' Bank of Miss. v. Sharp, 47 U.S. 301, 322-23 
(1848) (``in [making] notes and managing its property in legitimate 
banking business, [a bank] must be able to assign or sell those 
notes.'').
    \43\ Strike v. Trans-West Discount Corp., 92 Cal. App. 3d 735, 
745 (Cal. Ct. App. 4th Dist. 1979).
    \44\ Planters, 47 U.S. at 323.
---------------------------------------------------------------------------

    Commenters argued that the proposed rule is premised upon the 
assumption that the preemption of State law interest rate limits under 
section 27 is an assignable property interest. The proposed rule does 
not purport to allow State banks to assign the ability to preempt State 
law interest rate limits under section 27. Instead, the proposed rule 
would allow State banks to assign loans at their contractual interest 
rates. This is not the same as assigning the authority to preempt State 
law interest rate limits. For example, the proposed rule would not 
authorize an assignee to renegotiate the interest rate of a loan to an 
amount exceeding the contractual rate, even though the assigning bank 
may have been able to charge interest at such a rate. Consistent with 
section 27, the proposed rule would allow State banks to assign loans 
at the same interest rates at which they are permitted to make loans. 
This effectuates State banks' Federal statutory interest rate 
authority, and does not represent an extension of that authority.
    Commenters stated that Congress has expressly addressed the 
assignment of loans in other statutory provisions that preempt State 
usury laws, but did not do so in section 27, suggesting that section 27 
was not intended to apply following the assignment of a State bank's 
loan. In particular, these commenters point to section 501 of 
DIDMCA,\45\ which preempts State law interest rate limits with respect 
to certain mortgage loans. But careful consideration of section 501 and 
its legislative history appears to reinforce the view that banks can 
transfer enforceable rights in the loans they make under section 27. 
Section 501 does not expressly state that it applies after a loan's 
assignment.\46\ Nevertheless, it is implicit in section 501's text and 
structure that a loan exempted from State usury laws when it is made 
continues to be exempt from those laws upon assignment.\47\ Like 
section 501, section 27 is silent regarding the effect of the 
assignment or transfer of a loan, and should similarly be interpreted 
to apply following the assignment or transfer of a loan.
---------------------------------------------------------------------------

    \45\ 12 U.S.C. 1735f-7a.
    \46\ One comment letter suggested that the statute's reference 
to ``credit sales'' means that the statute applies to sales of 
mortgage loans, not just to originations of such loans. But the 
statute merely states that it applies to (and exempts from State 
usury laws) ``any loan, mortgage, credit sale, or advance'' that is 
``secured by'' first-lien residential mortgages. 12 U.S.C. 1735f-7a. 
The statute does not state that it applies to credit sales ``of'' 
first-lien residential mortgages. The statute is silent on what 
happens--upon assignment or sale--to loans, credits sales, or 
advances originated pursuant to the statute.
    \47\ The description of section 501 in the Committee Report 
appears to confirm this view: ``In connection with the provisions in 
this section, it is the Committee's intent that loans originated 
under this usury exemption will not be subject to claims of usury 
even if they are later sold to an investor who is not exempt under 
this section.'' Sen. Rpt. 96-368 at 19.
---------------------------------------------------------------------------

    Some commenters also argue that the FDIC lacked the authority to 
issue the proposed rule because they view State banks' power to assign 
loans as derived from State banking powers laws. The FDIC's authority 
to issue the rule, however, is not based on State law. Rather, it is 
based on section 27, which implicitly authorizes State banks to assign 
the loans they make at the interest rate specified by the statute. Nor 
is the FDIC's interpretation based on Federal common law or the valid-
when-made rule, as some comments argued. In the NPR, the FDIC stated 
that while the FDIC's interpretation of the statute was ``consistent'' 
with the valid-when-made rule, it was not based on it.\48\ The proposed 
rule's consistency with common law principles reinforces parties' 
established expectations, but as stated in the NPR, the FDIC's 
authority to issue the proposed rule arises under section 27 rather 
than common law.
---------------------------------------------------------------------------

    \48\ 84 FR 66848 (Dec. 6, 2019).
---------------------------------------------------------------------------

    One comment letter argued that the FDIC's proposed rule fails for 
lack of an explicit reference to assignment in the text of section 27, 
stating that a presumption against preemption applies to the proposed 
rule. In a case involving the OCC's interpretation of section 85, 
however, the Supreme Court noted that a similar argument invoking a 
presumption against preemption ``confuses the question of the 
substantive (as opposed to pre-emptive) meaning of a statute with the 
question of whether a statute is pre-emptive.'' \49\ The Court held 
that the presumption did not apply to OCC regulations filling statutory 
gaps in section 85 because those regulations addressed the substantive 
meaning of the statute, not ``the question of whether a statute is pre-
emptive.'' \50\ The Court reaffirmed that under its prior holdings, 
``there is no doubt that Sec.  85 pre-empts state law.'' \51\ Like 
section 85, section 27 also expressly pre-empts State laws that impose 
an interest rate limit lower than the interest rate permitted by 
section 27. Just as in Smiley, the question is what section 27 means, 
and thus, just as in Smiley, the presumption against preemption is 
inapplicable.
---------------------------------------------------------------------------

    \49\ Smiley v. Citibank (South Dakota), N.A., 517 U.S. at 744 
(emphasis in original).
    \50\ Id.
    \51\ Id.
---------------------------------------------------------------------------

    One commenter argued that the FDIC is bound by Madden's 
interpretation of section 85 under the Supreme Court's Brand X 
jurisprudence. The FDIC disagrees that the Madden decision interpreted 
section 85. Nevertheless, even if Madden did interpret section 85, the 
Supreme Court expressly stated that its Brand X decision does not 
``preclude[ ] agencies from revising unwise judicial constructions of 
ambiguous statutes.'' \52\ Because the statute here is ambiguous, Brand 
X does not preclude the FDIC from filling the two statutory gaps 
addressed by the proposed regulation. In any event, Madden's 
interpretation is binding--at most--only in the Second Circuit, and 
does not preclude the FDIC from adopting a different interpretation.
---------------------------------------------------------------------------

    \52\ Brand X, 545 U.S. at 983. Nothing in Madden holds that the 
statute unambiguously forecloses the agency's interpretation.
---------------------------------------------------------------------------

B. Evidentiary Basis for the Proposal

    Some commenters asserted that the proposed rule violates the 
Administrative Procedure Act \53\ because the FDIC did not provide 
evidence that State banks were unable to sell loans, or that the market 
for State

[[Page 44152]]

banks' loans was distressed. The Administrative Procedure Act does not 
require an agency to produce empirical evidence in rulemaking; rather, 
it must justify a rule with a reasoned explanation.\54\ Moreover, 
agencies may adopt prophylactic rules to prevent potential problems 
before they arise.\55\ The FDIC believes that safety and soundness 
concerns warrant clarification of the application of section 27 to 
State banks' loans, even if particular State banks or the loan market 
more generally are not currently experiencing distress. Market 
conditions can change quickly and without warning, potentially exposing 
State banks to increased risk in the event they need to sell their 
loans. The proposed rule would proactively promote State banks' safety 
and soundness, and it is well-established that empirical evidence is 
unnecessary where, as here, the ``agency's decision is primarily 
predictive.'' \56\ Nevertheless, the FDIC believes that there is 
considerable evidence of uncertainty following the Madden decision. 
Commenters pointed to studies discussing the effects of Madden in the 
Second Circuit, as well as anecdotal evidence of increased difficulty 
selling loans made to borrowers in the Second Circuit post-Madden.
---------------------------------------------------------------------------

    \53\ 5 U.S.C. 551 et seq.
    \54\ Stillwell v. Office of Thrift Supervision, 569 F.3d 514, 
519 (D.C. Cir. 2009). Although some statutes directed at other 
agencies require that rulemakings by those agencies be based on 
substantial evidence in the record, Section 27 imposes no such 
requirement, and neither does the APA. ``The APA imposes no general 
obligation on agencies to produce empirical evidence. Rather, an 
agency has to justify its rule with a reasoned explanation.'' Id.
    \55\ Id. (noting that ``[a]n agency need not suffer the flood 
before building the levee.'').
    \56\ Rural Cellular Ass'n v. FCC, 588 F.3d 1095, 1105 (D.C. Cir. 
2009).
---------------------------------------------------------------------------

    One commenter asserted that the proposal failed to include evidence 
showing that State banks rely on loan sales for liquidity, and stated 
that the 5,200 banks in the United States provide a robust market for 
State banks' loans. Securitizations, which the FDIC mentioned in the 
proposal, are an example of banks' reliance on the loan sale market to 
non-banks for liquidity.\57\ The comment's focus on whether banks 
obtain liquidity by selling loans to non-banks also is mistaken. The 
regulation is not directed at ensuring that State banks can assign 
their loans to non-banks; rather, it is directed at protecting these 
banks' right to assign their loans to any assignees, whether banks or 
non-banks. Moreover, under the commenter's interpretation of section 
27, not all 5,200 banks in the United States would be able to enforce 
the interest terms of an assigned loan. Only banks located in States 
that would permit the loan's contractual interest rate would be able to 
enforce the interest rate term of the loan. In addition, reliance on 
sales to banks alone would not address the FDIC's safety and soundness 
concerns, because banks may be unable to purchase loans sold by other 
banks in circumstances where there are widespread liquidity crises in 
the banking sector.\58\
---------------------------------------------------------------------------

    \57\ Indeed, the comment concedes that securitizations are a 
source of liquidity for banks, but argues that only the largest 
banks engage in securitizations of non-mortgage loans. But this 
actually appears to highlight the need for the regulation.
    \58\ The comment asserts that banks' primary sources of 
liquidity are deposits and wholesale funding markets, Federal Home 
Loan Bank advances, and the government-sponsored enterprises' cash 
windows, with the Federal Reserve's discount window as a backup. In 
the FDIC's experience, some of these sources of liquidity may be 
unavailable in a financial stress scenario. For example, if a bank 
is in troubled condition, there are significant restrictions on its 
ability to use the Federal Reserve's discount window to borrow funds 
to meet liquidity needs.
---------------------------------------------------------------------------

    The FDIC stated in the preamble to the proposed rule that it was 
unaware of ``widespread or significant effects on credit availability 
or securitization markets having occurred to this point as a result of 
the Madden decision,'' and some commenters misunderstood this statement 
as contradicting the basis for the proposed rule. This statement was 
included in the discussion of the proposal's potential effects, which 
the FDIC suggested might fall into two categories: (1) Immediate 
effects on loans in the Second Circuit that may have been directly 
affected by Madden; and (2) mitigation of the possibility that State 
banks located in other States might be impaired in their ability to 
sell loans in the future. While the available evidence suggested that 
Madden's effects on loan sales and availability of credit were 
generally limited to the Second Circuit states in which the decision 
applied, the FDIC still believes there would be benefits to addressing 
the legal ambiguity in section 27 before these effects become more 
widespread and pronounced.
    Another commenter asserted that the FDIC's proposal left unanswered 
questions about the effects Madden has had on securitization markets, 
and whether those effects justify the exemption of securitization 
vehicles and assigned loans from State usury laws. This exaggerates the 
effect of the proposal, which would not completely exempt loans from 
compliance with State usury laws. Rather, the proposed rule would 
clarify which State's usury laws would apply to a loan, and provide 
that whether interest on a loan is permissible under section 27 is 
determined as of the date the loan was made. While the proposal did not 
include evidence regarding the extent of Madden's effects on 
securitizations, commenters noted that State banks rely on the 
assignment of loans through secondary market securitizations to manage 
concentrations of credit and access other funding sources. Some 
commenters stated that Madden disrupted secondary markets for loans 
originated by banks and for interests in loan securitizations, and 
others provided anecdotal evidence that financial institutions involved 
in securitization markets have been unwilling to underwrite 
securitizations that include loans with rates above usury limits in 
States within the Second Circuit.
    Some commenters asserted that the proposal ignores a key aspect of 
the problem, in that it does not address the question of when a State 
bank is the true lender with respect to a loan. The commenters argue, 
in effect, that the question of whether a State bank is the true lender 
is intertwined with the question addressed by the rule--that is, the 
effect of the assignment or sale of a loan made by a State bank. While 
both questions ultimately affect the interest rate that may be charged 
to the borrower, the FDIC believes that they are not so intertwined 
that they must be addressed simultaneously by rulemaking.\59\ In many 
cases, there is no dispute that a loan was made by a bank. For example, 
there may not even be a non-bank involved in making the loan.\60\ The 
proposed rule would provide important clarification on the application 
of section 27 in such cases, reaffirming the enforceability of interest 
rate terms of State banks' loans following the sale, transfer, or 
assignment of the loan.
---------------------------------------------------------------------------

    \59\ Agencies have discretion in how to handle related, yet 
discrete, issues in terms of priorities and need not solve every 
problem before them in the same proceeding. Taylor v. Federal 
Aviation Administration, 895 F.3d 56, 68 (D.C. Cir. 2018).
    \60\ Madden itself was such a case, as the national bank did not 
write off the loan in question and sell it to a non-bank debt 
collector until three years after the consumer opened the account. 
See 786 F.3d at 247-48.
---------------------------------------------------------------------------

C. Consumer Protection

    Several commenters asserted that the regulation of interest rate 
limits has historically been a State function, and the proposed rule 
would change that by allowing non-banks that buy loans from State banks 
to charge rates exceeding State law limits. The framework that governs 
the interest rates charged by State banks includes both State and

[[Page 44153]]

Federal laws. As noted above, section 27 generally authorizes State 
banks to charge interest at the rate permitted by the law of the State 
in which the bank is located, even if that rate exceeds the rate 
permitted by the law of the borrower's State. Congress also recognized 
States' interest in regulating interest rates within their 
jurisdictions, giving States the authority to opt out of the coverage 
of section 27 with respect to loans made in the State. Through the 
proposed rule, the FDIC would clarify the application of this statutory 
framework. It also would reaffirm the enforceability of interest rate 
terms following the sale, transfer, or assignment of a loan.
    Several commenters asserted that the proposal would facilitate 
predatory lending. This concern, however, appears to arise from 
perceived abuses of longstanding statutory authority rather than the 
proposed rule. Federal court precedents have for decades allowed banks 
to charge interest at the rate permitted by the law of the bank's home 
State, even if that rate exceeds the rate permitted by the law of the 
borrower's State.\61\ Under longstanding views regarding the 
enforceability of interest rate terms on loans that a State bank has 
sold, transferred, or assigned, non-banks also have been permitted to 
charge the contract rate when they obtain a loan made by a bank. The 
rule would reinforce the status quo, which was arguably unsettled by 
Madden, with respect to these authorities, but it is not the basis for 
them.\62\ In addition, if States have concerns that nonbank lenders are 
using partnerships with out-of-State banks to circumvent State law 
interest rate limits, States are expressly authorized to opt out of 
section 27.
---------------------------------------------------------------------------

    \61\ Marquette Nat'l Bank v. First of Omaha Service Corp., 439 
U.S. 299 (1978); Greenwood Trust Co. v. Massachusetts, 971 F.2d 818, 
827 (1st Cir. 1992).
    \62\ Some commenters described State banks and non-banks that 
they believe have engaged in predatory lending. Because the proposed 
rule has yet to take effect, this reinforces the conclusion that 
such lending is based on existing statutory authority, rather than 
the proposed rule.
---------------------------------------------------------------------------

    Commenters also stated that the proposal would encourage so-called 
``rent-a-bank'' arrangements involving non-banks that should be subject 
to state laws and regulations. The proposed rule would not exempt State 
banks or non-banks from State laws and regulations. It would only 
clarify the application of section 27 with respect to the interest 
rates permitted for State banks' loans. Importantly, the proposed rule 
would not address or affect the broader licensing or regulatory 
requirements that apply to banks and non-banks under applicable State 
law. States also may opt out of the coverage of section 27 if they 
choose.
    Several commenters focused on ``true lender'' theories under which 
it may be established that a non-bank lender, rather than a bank, is 
the true lender with respect to a loan, with the effect that section 27 
would not govern the loan's interest rate. These commenters asserted 
that the proposed rule would burden State regulators and private 
citizens with the impractical task of determining which party is the 
true lender in such a partnership. Several commenters stated that the 
FDIC should establish rules for making this determination. The proposal 
did not address the circumstances under which a non-bank might be the 
true lender with respect to a loan, and did not allocate the task of 
making such a determination to any party. Given the policy issues 
associated with this type of partnership, consideration separate from 
this rulemaking is warranted. However, that should not delay this 
rulemaking, which addresses the need to clarify the interest rates that 
may be charged with respect to State banks' loans and promotes the 
safety and soundness of State banks.
    One commenter recommended that the FDIC revise the text of its 
proposed rule to reflect the intention not to preempt the true lender 
doctrine, suggesting that this was important to ensure that the rule is 
not used in a manner that exceeds the FDIC's stated intent. The FDIC 
believes that the text of the proposed regulation cannot be reasonably 
interpreted to foreclose true lender claims. The rule specifies the 
point in time when it is determined whether interest on a loan is 
permissible under section 27, but this is premised upon a State bank 
having made the loan. Moreover, including a specific reference to the 
true lender doctrine in the regulation could be interpreted to 
unintentionally limit its use, as courts might refer to this doctrine 
using different terms. Therefore, as discussed in the NPR, the rule 
does 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.
    Commenters also asserted that the FDIC's statement in the preamble 
to the proposed rule that it views unfavorably certain relationships 
between banks and non-banks does not square with the failure of 
regulators to sufficiently address instances of predatory lending. The 
FDIC believes that this rulemaking does not provide the appropriate 
avenue to address concerns regarding predatory lending by specific 
parties. The FDIC believes that it is important to put in place a 
workable rule clarifying the application of section 27. As discussed 
above, the proposal is not intended to foreclose remedies available 
under State law if there are concerns that particular banks or non-
banks are violating State law interest rate limits.

D. Effect of Opt Out by a State

    A commenter requested that the FDIC clarify how the proposed rule 
would interact with the right of states to opt out of section 27. As 
noted in the proposal, pursuant to section 525 of DIDCMA,\63\ 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, stating explicitly that the State 
does not want section 27 to apply with respect to loans made in such 
State. If a State opts out, neither section 27 nor its implementing 
regulations would apply to loans made in the State. In so far as these 
regulations codify existing law and interpretations of section 27, as 
reflected in FDIC General Counsel's Opinion No. 10 and 11, and are 
patterned after the equivalent regulations applicable to national 
banks, such interpretations would not apply with respect to loans made 
in a State that has elected to override section 27. These 
interpretations include the most favored lender doctrine, interest rate 
exportation, and the Federal definition of interest.\64\ Accordingly, 
if a State opts out of section 27, State banks making loans in that 
State could not charge interest at a rate exceeding the limit set by 
the State's laws, even if the law of the State where the State bank is 
located would permit a higher rate.
---------------------------------------------------------------------------

    \63\ 12 U.S.C. 1831d note.
    \64\ See 12 CFR 331.4(a) and (b), and 12 CFR 331.2, 
respectively.
---------------------------------------------------------------------------

E. Other Technical Changes

    Several commenters noted that the text of the FDIC's proposed 
regulations implementing section 27, and specifically proposed Sec.  
331.4(e), differed in certain respects from the regulations proposed by 
the OCC to implement section 85. Commenters suggested that this 
variance risks different judicial interpretations of statutes 
historically interpreted in pari materia, and recommended that the 
agencies harmonize the language of these provisions to reinforce that 
they accomplish the same result.
    The FDIC seeks through this rulemaking to maintain parity between 
State banks and national banks with

[[Page 44154]]

respect to interest rate authority. Section 27 has consistently been 
applied to State banks in the same manner as section 85 has been 
applied to national banks. The proposed rule is implementing section 27 
by adopting a rule that is parallel to those rules adopted by the OCC. 
The OCC has amended its rules to provide that interest on a loan that 
is permissible under section 85 and 1463(g)(1), respectively, shall not 
be affected by the sale, assignment, or other transfer of the loan. 
Ultimately, the objective and effect of the OCC's rule is fundamentally 
the same as the FDIC's proposed rule--to reaffirm that banks may assign 
their loans without affecting the validity or enforceability of the 
interest.
    In response to commenters' concerns, the FDIC is adopting non-
substantive revisions to the text of Sec.  331.4(e). Specifically, the 
second sentence of Sec.  331.4(e) will be more closely aligned with the 
text of the OCC's regulation. As a result, Sec.  331.4(e) of the final 
rule provides that 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. Interest on a loan that is permissible under 
section 27 of the Federal Deposit Insurance Act shall not be affected 
by 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, in whole or in part. These changes should not 
result in different outcomes from the proposed rule.
    A commenter suggested that the FDIC should consider clarifying the 
proposed rule to state that all price terms (including fees) on State 
banks' loans under section 27 remain valid upon sale, transfer, or 
assignment. The FDIC believes that the text of the proposed rule 
addresses this issue, as Sec.  331.2 broadly defined the term 
``interest'' for purposes of the rule to include fees. Therefore, fees 
that are permitted under the law of the State where the State bank is 
located would remain enforceable following the sale, transfer, or 
assignment of a State bank's loan.
    Another commenter suggested that the FDIC clarify that the 
application of Sec.  331.4(e) of the proposed rule would also include 
circumstances where a State bank has sold, assigned, or transferred an 
interest in a loan. The FDIC agrees that the sale, assignment, or 
transfer of a partial interest in a loan would fall within the scope of 
proposed Sec.  331.4(e), and the loan's interest rate terms would 
continue to be enforceable following such a transaction, and has made a 
clarifying change to the regulatory text to ensure there is no 
ambiguity.

IV. Description of the Final Rule

A. Application of Host State Law

    Section 331.3 of the final 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).\65\ Consistent with section 24(j)(1), the final 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.
---------------------------------------------------------------------------

    \65\ 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).
---------------------------------------------------------------------------

B. Interest Rate Authority

    Section 331.4 of the final 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 90-day commercial paper rate; 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 final rule is intended to maintain parity between State banks 
and national banks, and corresponds with the authority provided to 
national banks under the OCC's regulations at 12 CFR 7.4001(b).
    Paragraph (c) of Sec.  331.4 clarifies the effect of the final 
rule's definition of the term interest for purposes of State law. 
Importantly, the final rule's definition of interest does 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 are not 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 final rule corresponds to a similar provision in the OCC's 
regulations, 12 CFR 7.4001(c).
    Paragraph (d) of Sec.  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 is permitted 
to charge

[[Page 44155]]

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 interest 
on a loan permissible under section 27 shall not be affected by a 
change in State law, a change in the relevant commercial paper rate, or 
the sale, assignment, or other transfer of the loan, in whole or in 
part. 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).

V. Expected Effects

    The final rule is intended to address uncertainty regarding the 
applicability of State law interest rate restrictions to State banks 
and other market participants. The final rule would reaffirm the 
ability of State banks to sell and securitize loans they originate. 
Therefore, as described in more detail below, the final rule should 
mitigate the potential for future disruption to the markets for loan 
sales and securitizations, including FDIC-R loan sales and 
securitizations, and a resulting contraction in availability of 
consumer credit.
    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' and FDIC-R's 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 and outlined by studies raised by commenters.
    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.'' \66\ Such uncertainty has the potential to chill State banks' 
willingness to make the types of loans affected by the final rule. By 
reducing such uncertainty, the final rule should mitigate the potential 
for future reductions in the availability of credit.
---------------------------------------------------------------------------

    \66\ ``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.'' \67\ 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.\68\
---------------------------------------------------------------------------

    \67\ Moody's Investors Service, ``Uncertainty Lingers as Supreme 
Court Declines to Hear Madden Case'' (Jun. 29, 2016).
    \68\ 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) (http://ssrn.com/abstract=3209808 or 
http://dx.doi.org/10.2139/ssrn.3208908).
---------------------------------------------------------------------------

    Particularly in jurisdictions affected by Madden, to the extent the 
final 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 final 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 final 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 final rule should make State banks' 
loans more marketable, enhancing State banks' ability to 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. Avoiding such disruption would also 
maintain the FDIC's ability to fulfill its mission to maintain 
stability and public confidence in the nation's financial system by 
carrying out all of the tasks triggered by the closure of an FDIC-
insured institution, including selling portfolio of loans from failed 
financial institutions in the secondary marketplace in order to 
maximize the net present value return from the sale or disposition of 
such assets and minimize the amount of any loss, both to protect the 
DIF. Additionally, securitizing or selling loans gives State banks 
flexibility to comply with risk-based capital requirements.
    Similarly, the final 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.
    The final rule would also 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.
    Finally, to the extent the final rule contributes to a return to 
the pre-Madden status quo regarding market participants' understanding 
of the applicability of State usury laws, the FDIC does not expect 
immediate widespread effects on credit availability.

[[Page 44156]]

While several commenters cited to studies discussing the adverse 
effects of Madden in the Second Circuit, as well as anecdotal evidence 
of increased difficulty selling loans made to borrowers in the Second 
Circuit post-Madden, 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. However, courts across the country continue to address legal 
questions raised in the Madden decision, raising the possibility that 
future decisions will put further pressure on credit availability or 
securitization markets, reinforcing the need for clarification by the 
FDIC.\69\
---------------------------------------------------------------------------

    \69\ Compare In re Rent Rite Superkegs West, Ltd. 603 B.R. 41 
(Bankr. Colo. 2019) (holding assignment of a loan by a bank to a 
non-bank did not render the interest rate impermissible under 
Colorado law based upon 12 U.S.C. 1831d) with Fulford v. Marlette 
Funding, LLC, No. 2017-CV-30376 (Col. Dist. Ct. City & County of 
Denver, Mar. 3, 2017) (holding that the non-bank purchasers are 
prohibited under Colo. Rev. Stat. sec. 5-2-201 from charging 
interest rates in the designated loans in excess of Colorado's 
interest caps, that a bank cannot export its interest rate to a 
nonbank, and finally, that the Colorado statute is not preempted by 
Section 27).
---------------------------------------------------------------------------

VI. Regulatory Analysis

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) generally requires that, in 
connection with a final rulemaking, an agency prepare and make 
available for public comment a final regulatory flexibility analysis 
that describes the impact of the rule on small entities.\70\ However, a 
final 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.\71\ The Small Business 
Administration (SBA) has defined ``small entities'' to include banking 
organizations with total assets of less than or equal to $600 
million.\72\
---------------------------------------------------------------------------

    \70\ 5 U.S.C. 601 et seq.
    \71\ 5 U.S.C. 605(b).
    \72\ 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.
---------------------------------------------------------------------------

    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 final 
rule on small entities in accordance with the RFA. Based on its 
analysis and for the reasons stated below, the FDIC certifies that the 
final rule will not have a significant economic impact on a substantial 
number of small entities. Nevertheless, the FDIC is presenting this 
additional information.
Reasons Why This Action Is Being Considered
    The Second Circuit's Madden decision 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 \73\ from 
national banks are subject to usury laws of the debtor's State \74\ 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].'' \75\ 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 
finalized please refer to SUPPLEMENTARY INFORMATION Section II in this 
Federal Register document entitled ``Background: Current Regulatory 
Approach and Market Environment.''
---------------------------------------------------------------------------

    \73\ In Madden, the relevant debt was a consumer debt (credit 
card) account.
    \74\ 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.
    \75\ 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).
---------------------------------------------------------------------------

Objectives and Legal Basis
    The policy objective of the final rule is to eliminate uncertainty 
regarding the enforceability of loans originated and sold by State 
banks. The FDIC is finalizing regulations that implement sections 24(j) 
and 27 of the FDI Act. For additional discussion of the objectives and 
legal basis of the final 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 December 31, 2019, there were 3,740 State-chartered banks 
insured by the FDIC, of which 2,847 have been identified as ``small 
entities'' in accordance with the RFA.\76\ All 2,847 small State-
chartered FDIC-insured banks are covered by the final rule, and 
therefore, could be affected. However, only 32 small State-chartered 
FDIC-insured banks 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 State banks 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 banks 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 banks, as well as present and future plans to sell or 
transfer assets. The FDIC does not have this information.
---------------------------------------------------------------------------

    \76\ FDIC Call Report Data, December 31, 2019.
---------------------------------------------------------------------------

Expected Effects
    The final 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 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.
    As described above, the significant uncertainty resulting from 
Madden may discourage the origination and sale of loan products whose 
contractual interest rates could potentially exceed State usury limits 
by small State-chartered banks in the Second Circuit. The final rule 
could increase the availability of such loans from State banks, but the 
FDIC believes the number

[[Page 44157]]

of State banks materially engaged in making loans of this type to be 
small.
    The small State-chartered banks 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 
final rule does not pose any new reporting, recordkeeping, or other 
compliance requirements for small State banks.
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.
Public Comments
    The FDIC received no public comments on the content of the RFA 
section of the notice of proposed rulemaking. However, some commenters 
made general claims that the rule would adversely impact small 
businesses.\77\ As noted above in the discussion of comments, this 
concern appears to stem from perceived abuses of longstanding statutory 
authority rather than the final rule. Because the final rule affirms 
the pre-Madden status quo, the FDIC expects small businesses to be as 
affected by the rule to the same extent they were affected by the state 
of affairs that prevailed prior to the Madden decision. For a 
discussion of the comments submitted in response to the notice of 
proposed rulemaking in general, refer to Section III of this document.
---------------------------------------------------------------------------

    \77\ See Comment Letter, Center for Responsible Lending, et al., 
at 31.
---------------------------------------------------------------------------

Discussion of Significant Alternatives
    The FDIC believes the amendments will not have a significant 
economic impact on a substantial number of small State banks, and 
therefore believes that there are no significant alternatives to the 
amendments that would reduce the economic impact on small entities.

B. Congressional Review Act

    For purposes of Congressional Review Act, the Office of Management 
and Budget (OMB) makes a determination as to whether a final rule 
constitutes a ``major'' rule.\78\ The OMB has determined that the final 
rule is not a major rule for purposes of the Congressional Review Act. 
If a rule is deemed a ``major rule'' by the OMB, the Congressional 
Review Act generally provides that the rule may not take effect until 
at least 60 days following its publication.\79\ The Congressional 
Review Act defines a ``major rule'' as any rule that the Administrator 
of the Office of Information and Regulatory Affairs of the OMB finds 
has resulted in or is likely to result in--(A) an annual effect on the 
economy of $100,000,000 or more; (B) a major increase in costs or 
prices for consumers, individual industries, Federal, State, or Local 
government agencies or geographic regions, or (C) significant adverse 
effects on competition, employment, investment, productivity, 
innovation, or on the ability of United States-based enterprises to 
compete with foreign-based enterprises in domestic and export 
markets.\80\ As required by the Congressional Review Act, the FDIC will 
submit the final rule and other appropriate reports to Congress and the 
Government Accountability Office for review.
---------------------------------------------------------------------------

    \78\ 5 U.S.C. 801 et seq.
    \79\ 5 U.S.C. 801(a)(3).
    \80\ 5 U.S.C. 804(2).
---------------------------------------------------------------------------

C. Paperwork Reduction Act of 1995

    In accordance with the requirements of the Paperwork Reduction Act 
of 1995,\81\ 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 OMB control number. The final rule does not 
require any new information collections or revise existing information 
collections, and therefore, no submission to OMB is necessary.
---------------------------------------------------------------------------

    \81\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

D. 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.\82\ Subject 
to certain exceptions, new regulations and amendments to regulations 
prescribed by a Federal banking agency that impose additional 
reporting, disclosures, or other new requirements on insured depository 
institutions shall take effect on the first day of a calendar quarter 
that begins on or after the date on which the regulations are published 
in final form.\83\
---------------------------------------------------------------------------

    \82\ 12 U.S.C. 4802(a).
    \83\ 12 U.S.C. 4802(b).
---------------------------------------------------------------------------

    The final rule does not impose additional reporting or disclosure 
requirements on insured depository institutions, including small 
depository institutions, or on the customers of depository 
institutions. Accordingly, the FDIC concludes that section 302 of 
RCDRIA does not apply. The FDIC invited comment regarding the 
application of RCDRIA to the final rule, but did not receive comments 
on this topic.

E. The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families

    The FDIC has determined that the final 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, 
Public Law 105-277, 112 Stat. 2681.

F. Plain Language

    Section 722 of the Gramm-Leach-Bliley Act, Public Law 106-102, 113 
Stat. 1338, 1471 (Nov. 12, 1999), requires the Federal banking agencies 
to use plain language in all proposed and final rulemakings published 
in the Federal Register after January 1, 2000. FDIC staff believes the 
final rule is presented in a simple and straightforward manner. The 
FDIC invited comment with respect to the use of plain language, but did 
not receive any comments on this topic.

List of Subjects in 12 CFR Part 331

    Banks, banking, Deposits, Foreign banking, Interest rates.

Authority and Issuance

0
For the reasons stated in the preamble, the Federal Deposit Insurance 
Corporation amends 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.

[[Page 44158]]

331.3 Application of host State law.
331.4 Interest rate authority.

    Authority: 12 U.S.C. 1819(a)(Tenth), 1820(g), 1831d.


Sec.  331.1  Authority, purpose, and scope.

    (a) Authority. The regulations in this part are issued by the 
Federal Deposit Insurance Corporation (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 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 90-day commercial paper means the rate quoted by the 
Federal Reserve Board of Governors for 90-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.  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 (a), 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 90-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. 
Interest on a loan that is permissible under section 27 of the Federal 
Deposit Insurance Act shall not be affected by 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, in whole or in 
part.

Federal Deposit Insurance Corporation.
    By order of the Board of Directors.

    Dated at Washington, DC, on June 25, 2020.
James P. Sheesley,
Acting Assistant Executive Secretary.
[FR Doc. 2020-14114 Filed 7-21-20; 8:45 am]
BILLING CODE 6714-01-P