Federal Interest Rate Authority
Final rule.
CFR Part: "12 CFR Part 331"
RIN Number: "RIN 3064-AF21"
Citation: "85 FR 44146"
Page Number: "44146"
"Rules and Regulations"
Agency: "
SUMMARY: The
DATES: The rule is effective on
FOR FURTHER INFORMATION CONTACT:
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
FOOTNOTE 1 84 FR 66845 (
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
FOOTNOTE 2 786 F.3d 246 (2d Cir. 2015). END FOOTNOTE
FOOTNOTE 3 The Secretary of the
As described in more detail below, the
II. Background: Current Regulatory Approach and Market Environment
A.
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/
FOOTNOTE 4 12 U.S.C. 85. END FOOTNOTE
Soon after the statute was enacted, the
FOOTNOTE 5
FOOTNOTE 6 See Fisher v.
Subsequently, the
FOOTNOTE 7
FOOTNOTE 8 See Smiley v.
B.
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.
FOOTNOTE 9 See United State v.
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,
FOOTNOTE 10 Public Law 96-221, 94 Stat. 132, 164-168 (1980). END FOOTNOTE
FOOTNOTE 11 See Statement of
FOOTNOTE 12
FOOTNOTE 13 12 U.S.C. 1831d(a). END FOOTNOTE
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
FOOTNOTE 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. END FOOTNOTE
FOOTNOTE 15 See, e.g.,
FOOTNOTE 16
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.
FOOTNOTE 17 12 U.S.C. 1831d note. END FOOTNOTE
FOOTNOTE 18 See 1980 Iowa Acts 1156 sec. 32;
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.
FOOTNOTE 19 Public Law 103-328, 108 Stat. 2338 (
FOOTNOTE 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. END FOOTNOTE
FOOTNOTE 21 12 U.S.C. 36(f)(1)(A)(ii). END FOOTNOTE
FOOTNOTE 22 Public Law 103-328, sec. 102(a). END FOOTNOTE
FOOTNOTE 23 Public Law 105-24, 111 Stat. 238 (
FOOTNOTE 24 12 U.S.C. 1831a(j)(1). END FOOTNOTE
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
FOOTNOTE 25
FOOTNOTE 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
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
FOOTNOTE 27 Interpretive Letter No. 822 at 9 (citing statement of
FOOTNOTE 28 Interpretive Letter No. 822 at 10. END FOOTNOTE
FOOTNOTE 29
The effect of
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 of section 27, /30/ the
FOOTNOTE 30 In 12 U.S.C. 1819(a),
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
FOOTNOTE 31
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
FOOTNOTE 32 12 U.S.C. 1821(d). END FOOTNOTE
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
FOOTNOTE 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.
FOOTNOTE 34
FOOTNOTE 35 See Olvera v.
The
FOOTNOTE 36 See, e.g., N.Y Banking Law sec. 961(1) (granting
FOOTNOTE 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
F. Proposed Rule
On
FOOTNOTE 38 See 85 FR 33530, 33531 (
The comment period for the
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
In addition to these general themes, commenters raised a number of specific concerns with respect to the
A.
Some commenters asserted that the proposed rule exceeds the
FOOTNOTE 39 See 84 FR 66848. END FOOTNOTE
FOOTNOTE 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). END FOOTNOTE
Some commenters argued that the
FOOTNOTE 41
FOOTNOTE 42
FOOTNOTE 43 Strike v.
FOOTNOTE 44 Planters, 47 U.S. at 323. END FOOTNOTE
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
FOOTNOTE 45 12 U.S.C. 1735f-7a. END FOOTNOTE
FOOTNOTE 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. END FOOTNOTE
FOOTNOTE 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. END FOOTNOTE
Some commenters also argue that the
FOOTNOTE 48 84 FR 66848 (
One comment letter argued that the
FOOTNOTE 49 Smiley v.
FOOTNOTE 50 Id. END FOOTNOTE
FOOTNOTE 51 Id. END FOOTNOTE
One commenter argued that the
FOOTNOTE 52 Brand X, 545 U.S. at 983. Nothing in Madden holds that the statute unambiguously forecloses the agency's interpretation. END FOOTNOTE
B. Evidentiary Basis for the Proposal
Some commenters asserted that the proposed rule violates the Administrative Procedure Act /53/ because the
FOOTNOTE 53 5 U.S.C.
FOOTNOTE 54 Stillwell v.
FOOTNOTE 55 Id. (noting that "[a]n agency need not suffer the flood before building the levee."). END FOOTNOTE
FOOTNOTE 56 Rural Cellular Ass'n v. FCC, 588 F.3d 1095, 1105 (
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
FOOTNOTE 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. END FOOTNOTE
FOOTNOTE 58 The comment asserts that banks' primary sources of liquidity are deposits and wholesale funding markets,
The
Another commenter asserted that the
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
FOOTNOTE 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.
FOOTNOTE 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. END FOOTNOTE
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 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.
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.
FOOTNOTE 61 Marquette Nat'l Bank v. First of
FOOTNOTE 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. END FOOTNOTE
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
One commenter recommended that the
Commenters also asserted that the
D. Effect of Opt Out by a State
A commenter requested that the
FOOTNOTE 63 12 U.S.C. 1831d note. END FOOTNOTE
FOOTNOTE 64 See 12 CFR 331.4(a) and (b), and 12 CFR 331.2, respectively. END FOOTNOTE
E. Other Technical Changes
Several commenters noted that the text of the
The
In response to commenters' concerns, the
A commenter suggested that the
Another commenter suggested that the
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.
FOOTNOTE 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). END FOOTNOTE
B.
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
Paragraph (d) of
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
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.
FOOTNOTE 66 "Madden v. Midland Funding: A Sea Change in Secondary Lending Markets,"
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
FOOTNOTE 67
FOOTNOTE 68 See
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
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
FOOTNOTE 69 Compare In re
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/
FOOTNOTE 70 5 U.S.C.
FOOTNOTE 71 5 U.S.C. 605(b). END FOOTNOTE
FOOTNOTE 72 The SBA defines a small banking organization as having
Generally, the
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
FOOTNOTE 73 In Madden, the relevant debt was a consumer debt (credit card) account. END FOOTNOTE
FOOTNOTE 74 A violation of
FOOTNOTE 75 Madden, 786 F.3d at 251 (referencing
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
Number of Small Entities Affected
As of
FOOTNOTE 76 FDIC Call Report Data,
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
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
Public Comments
The
FOOTNOTE 77 See Comment Letter,
Discussion of Significant Alternatives
The
B. Congressional Review Act
For purposes of Congressional Review Act, the
FOOTNOTE 78 5 U.S.C.
FOOTNOTE 79 5 U.S.C. 801(a)(3). END FOOTNOTE
FOOTNOTE 80 5 U.S.C. 804(2). END FOOTNOTE
C. Paperwork Reduction Act of 1995
In accordance with the requirements of the Paperwork Reduction Act of 1995, /81/ the
FOOTNOTE 81 44 U.S.C. 3501 et seq. END FOOTNOTE
D.
Section 302 of the
FOOTNOTE 82 12 U.S.C. 4802(a). END FOOTNOTE
FOOTNOTE 83 12 U.S.C. 4802(b). END FOOTNOTE
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
E. The
The
F. Plain Language
Section 722 of the Gramm-Leach-Bliley Act, Public Law 106-102, 113 Stat. 1338, 1471 (
List of Subjects in 12 CFR Part 331 Banks, banking, Deposits, Foreign banking, Interest rates.
Authority and Issuance
For the reasons stated in the preamble, the
PART 331--FEDERAL INTEREST RATE AUTHORITY
Sec.
331.1Authority, purpose, and scope.
331.2Definitions.
331.3Application of host State law.
331.4Interest rate authority.
Authority: 12 U.S.C. 1819(a)(Tenth), 1820(g), 1831d.
SEC331.1Authority, purpose, and scope.
(a) Authority. The regulations in this part are issued by the
(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
(c) Scope. The regulations in this part apply to State-chartered banks and insured branches of foreign banks.
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
State bank has the same meaning as that term in section 3 of the Federal Deposit Insurance Act, 12 U.S.C. 1813.
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.
SEC331.4Interest 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.
By order of the Board of Directors.
Dated at
Acting Assistant Executive Secretary.
[FR Doc. 2020-14114 Filed 7-21-20;
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