District Court Upholds OCC’s Valid When Made Rule

Earlier this month, the U.S. District Court for the Northern District of California ruled against a challenge to the OCC’s “valid when made” rule that was brought by California, Illinois, and New York after the rule was finalized in 2020. The rule clarifies that determining whether interest on a loan is allowable is decided when the loan is made, and that transferring the loan to a third party does not invalidate it.

Michael Hsu, Acting Comptroller of the Currency issued a statement following the court’s decision, noting that “this legal certainty should be used to the benefit of consumers and not be abused. I want to reiterate that predatory lending has no place in the federal banking system. The OCC is committed to strong supervision that expands financial inclusion and ensures banks are not used as a vehicle for“rent-a-charter” arrangements.

In their complaint, California, Illinois, and New York argued that the rule creates a regulatory vacuum that allows non-banks to ignore state interest rate caps. They also accused the OCC of failing to see that the rule allowed lenders to evade state law by partnering with national banks.

The court order stated that the OCC made an informed decision and that as “these are matters within the OCC’s discretion and expertise, the court should defer to the OCC’s judgments and uphold the final rule,” according to the National Law Review.

Representative Patrick McHenry, Ranking Member on the House Financial Services Committee, applauded the ruling.

“I’m glad to see the court affirm the OCC’s Valid-When-Made rule. By upholding these clear rules of the road for bank and non-bank partnerships, this decision will allow them to continue improving access to credit for American consumers,” McHenry said.

Resolving the lawsuit helps to relieve uncertainty for consumer and commercial credit in the primary and secondary markets, especially for the secondary market for loans created by national banks.