Interest Rate Exportation Under Attack Part II

Consumer Finance Monitor

The 1978 landmark opinion in Marquette National Bank v. First of Omaha Service Corp held that under the National Bank Act, a national bank has the right to export the interest rate authorized by the state where the bank is located to borrowers located elsewhere. Section 521 of the Depository Institutions Deregulation and Monetary Control Act of 1980 ("DIDMCA") conferred equivalent rate exportation powers on state-chartered, FDIC-insured banks.

These interest rate exportation powers (which also extend to certain fees), coupled with technological advances in recent years and the advent of “bank-model” and “banking as a service” (BaaS) programs, have created a robust, competitive smorgasbord of credit products for consumers.

However, rate exportation, and the programs it enables, increasingly are subject to challenges from a variety of sources.

In this two-part episode, which repurposes portions of a recent webinar, we describe the nature of these attacks, the defenses being deployed by the industry, and who is winning these contests so far, and address what the future may hold for rate exportation.

We start Part II with a discussion of states that have adopted, or are considering, “true lender” statutes that aim to recharacterize fintechs and other bank service providers as lenders, thus defeating the originating bank’s ability to export rates and fees. We then discuss “true lender” enforcement actions and efforts by state attorneys general, and “true lender” litigation developments including cases where arbitration clauses have been upheld, causing arbitration to be ordered in putative class actions. Next, we talk about attacks on the “valid when made” doctrine (which provides that a loan that was non-usurious when it was made doesn't become usurious after it is transferred to a third party), and “valid when made” regulations adopted by both the OCC and FDIC. We proceed with some tips on how prevailing industry plaintiffs who seek to overturn statutes inimical to rate exportation might recover attorney’s fees. We then conclude with a review of recent and pending Supreme Court cases whose outcomes have the potential to affect rate exportation powers and related regulations.

Alan Kaplinsky, Senior Counsel in Ballard Spahr’s Consumer Financial Services Group, moderates episode, joined by John Culhane, Joseph Schuster, and Ronald Vaske, Partners in the Group, and Mindy Harris and Kristen Larson, Of Counsel in the Group.