No. 15-1618
IN THE
United States Court of Appeals
FOR THE FOURTH CIRCUIT
Jeremy Powell and Tina Powell,
Plaintiffs-Appellees,
v.
The Huntington National Bank,
Defendant-Appellant.
On Appeal from the United States District Court
for the Southern District of West Virginia
BRIEF OF AMICI CURIAE AMERICAN BANKERS ASSOCIATION
AND CONSUMERS BANKERS ASSOCIATION
SUPPORTING APPELLANT AND REVERSAL
Steven I. Zeisel
CONSUMER BANKERS
ASSOCIATION
1225 Eye St. NW, Suite 550
Washington, DC 20005
(202) 552-6363
Of Counsel
Thomas Pinder
AMERICAN BANKERS
ASSOCIATION
1120 Connecticut Ave. NW
Washington, DC 20036
(202) 663-7524
Counsel for Amici Curiae
July 23, 2015
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CORPORATE DISCLOSURE STATEMENT
Pursuant to Rule 26.1 of the Federal Rules of Appellate Procedure, Amici
Curiae the American Bankers Association and the Consumer Bankers Association
make the following disclosure:
Amici are unincorporated entities; they are not publicly held corporations,
nor are they similarly situated entities which issues public shares. Amici do not
have parent companies, nor does any publicly held corporation have any form of
ownership over them. Amici are not aware of any publicly held entity that has a
direct financial interest in this case.
/s/ Thomas Pinder
Thomas Pinder
AMERICAN BANKERS ASSOCIATION
1120 Connecticut Ave. NW
Washington, DC 20036
(202) 663-7524
July 23, 2015
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TABLE OF CONTENTS
CORPORATE DISCLOSURE STATEMENT ......................................................... i
TABLE OF AUTHORITIES ................................................................................... iii
INTRODUCTION ..................................................................................................... 1
STATEMENT OF INTEREST .................................................................................. 1
STATEMENT REGARDING PARTICIPATION BY THE PARTIES ................... 3
SUMMARY OF ARGUMENT ................................................................................. 3
ARGUMENT ............................................................................................................. 4
I. THE ORDER THREATENS SERIOUS DISRIPTION OF THE
LENDING MARKETS ................................................................................... 4
A. The Order Obfuscates the Preemption Laws of a National
Bank’s Home State. ............................................................................... 4
B. The Order Limits a National Bank’s Ability to Service and Sell
Loans. .................................................................................................... 7
C. The Order May Constrict Lending and Limit Consumers
Access to Credit. ..................................................................................10
CONCLUSION ........................................................................................................11
CERTIFICATE OF COMPLIANCE .......................................................................12
CERTIFICATE OF FILING AND SERVICE ........................................................13
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TABLE OF AUTHORITIES
Page(s)
Cases
Barnett Bank of Marion Cnty, N.A. v. Nelson,
517 U.S. 25 (1996) .............................................................................................1, 5
Beneficial Nat’l Bank v. Anderson,
539 U.S. 1 (2003) ...............................................................................................3, 5
Franklin Nat. Bank of Franklin Square v. New York,
347 U.S. 373 (1954) ............................................................................................... 1
Gaither v. Farmers & Mech. Bank of Georgetown,
26 U.S. 37 (1828) ................................................................................................... 4
In re Late Fee and Over-Limit Fee Litig.,
741 F.3d 1022 (9th Cir. 2014) ................................................................................ 3
Nichols v. Fearson,
32 U.S. 103 (1833) ................................................................................................. 4
Tiffany v. Nat’l Bank of Missouri,
85 U.S. (18 Wall.) 409, 412 (1873) ........................................................................ 5
Wachovia Bank, N.A. v. Burke,
414 F.3d 305 (2d Cir. 2005) ................................................................................... 6
Watters v. Wachovia Bank, N.A.,
550 U.S. 1 (2007) ................................................................................................... 1
Statutes
12 U.S.C. § 24 ............................................................................................................ 5
12 U.S.C. § 85 ............................................................................................................ 4
12 U.S.C. § 371 .......................................................................................................... 5
Regulations
12 C.F.R. pt. 3. ........................................................................................................... 8
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12 C.F.R. § 7.4008(a) ................................................................................................. 6
12 C.F.R. § 7.4008(d) ................................................................................................ 6
12 C.F.R. § 34.3(a) ..................................................................................................... 6
12 C.F.R. § 34.4(a) ..................................................................................................... 6
Other Authorities
Cong. Budget Office, Developing a Secondary Market for Small
Business Loans, 31 (Aug. 1994) ............................................................................ 9
FDIC, Bank Data & Statistics, Mar. 31, 2015,
https://www.fdic.gov/bank/ statistical/ ................................................................... 9
OCC Bulletin 2014-37, Risk Management Guidance (Aug. 4, 2014) ....................... 8
OCC, Comptroller’s Handbook (Apr. 1998) .................................................. 7, 8, 10
OCC, Credit Topics,
http://www.occ.gov/topics/credit/commercial-credit/loan-sales.html
(last visited July 18, 2015)...................................................................................... 7
OCC, Interpretive Letter 296,
1984 WL 63804 (July 19, 1984) ............................................................................ 6
Office of Thrift Supervision, Op. Letter No. P-2003-5,
2003 WL 24040104 (July 22, 2003) ..................................................................... 4
Anthony Saunders and Marcia M. Cornett, Financial Institutions Management:
A Risk Management Approach, 3-5 (McGraw-Hill, 6th ed. 2008). ...................... 7
Blaise Gadanecz, The Syndicated Loan Market: Structure, Development and
Implications, BIS Quarterly Rev., 83-85 (Dec. 2004) ........................................... 9
Katerina Simons, Why Do Banks Syndicate Loans?,
New England Econ. Rev. 45. (Jan./Feb. 1993), available at
https://www.bostonfed.org/economic/neer/neer1993/neer193c.pdf ...................... 8
Rebecca Demesetz, Bank Loan Sales: A New Look at the Motivations for
Secondary Market Activity, 69 Fed. Reserve Bank of N.Y., 2 (Mar. 1999) ......... 8
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Yaron Leitner, Why Do Markets Freeze? Bus. Rev., Fed. Reserve Bank of
Philadelphia, 12-13 (2011) ..................................................................................... 9
Zvi Bodie et al., Investments (McGraw-Hill, 8th ed. 2009) ....................................10
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INTRODUCTION
The district court’s order (JA 1-13, referred to as the “Order”) disrupts the
settled expectations of the banking industry by holding that the National Bank Act
(“NBA”) does not preempt the application of state usury laws to the exportation of
a national bank’s interest charges. The Order conflicts with established Supreme
Court precedent that has consistently held that “state law may not significantly
burden[,] . . . curtail or hinder a national bank’s efficient exercise of any . . .
power” granted to national banks under the National Bank Act (“NBA”). Watters
v. Wachovia Bank, N.A., 550 U.S. 1, 13 (2007) (citing Barnett Bank of Marion
Cnty, N.A. v. Nelson, 517 U.S. 25, 33-34 (1996); Franklin Nat. Bank of Franklin
Square v. New York, 347 U.S. 373, 375-379 (1954)). The Order’s dilution of the
NBA violates established preemption law, will negatively affect banking, and harm
consumers.
STATEMENT OF INTEREST
The American Bankers Association (“ABA”) is the principal national trade
association of the financial services industry in the United States. ABA’s members,
located in fifty states, the District of Columbia, and Puerto Rico, include financial
institutions of all sizes and types, and they hold a majority of the domestic assets of
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the U.S. banking industry. ABA frequently submits amicus curiae briefs in matters
that significantly affect its members and the business of banking.
The Consumer Bankers Association (“CBA”) is the only national financial
trade group focused exclusively on retail banking and personal financial services
— banking services geared toward consumers and small businesses. CBA
members include the nation’s largest bank holding companies as well as regional
and super-community banks that collectively hold two-thirds of the total assets of
depository institutions.
Amici are trade associations that collectively represent approximately 1,000
national banks and other depository institutions that rely on the exportation of their
home state’s interest rates pursuant to federal law. The Order seriously threatens
the ability of amici’s members to exercise their statutory and regulatory authority
to make and service loans and is in conflict with longstanding precedent and
fundamental principles of preemption. The National Bank Act (“NBA”) explicitly
grants national banks the power to impose interest charges permitted by the law of
its home state, and any other state laws that would prevent the imposition of those
charges are preempted. Amici therefore have sought permission under Federal
Rule of Appellate Procedure 29(b) to file this brief in support of Appellant.
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STATEMENT REGARDING PARTICIPATION BY THE PARTIES
Pursuant to FRAP 29(c)(5), the undersigned counsel of record certifies that
this brief was not authored by a party’s counsel, nor did any party or any party’s
counsel contribute money intended to fund this brief, and no person other than
ABA and CBA, its members, or its counsel contributed money to fund this brief.
SUMMARY OF ARGUMENT
The Supreme Court has repeatedly recognized that the NBA provisions
codified at 12 U.S.C. §§ 85 and 86 were intended to create “uniform rules limiting
the liability of national banks” and to prevent states from imposing “substantive
limits on the rates of interest that national banks may charge.” Beneficial Nat’l
Bank v. Anderson, 539 U.S. 1, 9, 10 (2003). For this reason, it has long been
understood that “federal law permits [national banks] to charge [interest] to all
their customers as long as the fees are legal in the [banks’] home states.” In re
Late Fee and Over-Limit Fee Litig., 741 F.3d 1022, 1025 (9th Cir. 2014). Instead,
the Order permits states to ban national banks from imposing select interest
charges, even if the laws of the banks’ home state permit those charges. Amici
urge this Court to follow the NBA and reverse the Order below.
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ARGUMENT
I. THE ORDER THREATENS SERIOUS DISRIPTION OF THE
LENDING MARKETS
A. The Order Obfuscates the Preemption Laws of a National Bank’s
Home State.
Under longstanding and settled authority, a loan is usurious either at the time
it is made or not at all. In 1828, almost 200 years ago, the U.S. Supreme Court
confirmed that a non-usurious loan could not subsequently become usurious by
being sold. Gaither v. Farmers & Mech. Bank of Georgetown, 26 U.S. 37, 43
(1828) (“[F]or 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.”). The Court deemed this doctrine as the “cardinal rule” of usury.
Nichols v. Fearson, 32 U.S. 103, 109 (1833).
Practically two centuries later it is still widely understood that when a
national bank exports interest charges it is non-usurious by virtue of 12 U.S.C.
§ 85—which expressly preempts state usury law with respect to loans made by
national banks. Meaning, the loan does not become usurious when transferred to a
different state, regardless of the statutory limits of the state to where the rates were
exported. See id.; see also, e.g., Office of Thrift Supervision, Op. Letter No. P-
2003-5, 2003 WL 24040104 (July 22, 2003) (noting “the general principle that
loan terms should not change simply because an originator entitled to federal
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preemption may sell or assign a loan to an investor that is not entitled to federal
preemption”).
Unfortunately the Order fails to adequately consider this fundamental
principle. The Order disrupts the “uniform rules” applicable to a national bank’s
interest charges that have been deemed “indispensable” to the national banking
system enacted by Congress. Beneficial Nat’l Bank, 539 U.S. at 9, 10; Tiffany v.
Nat’l Bank of Missouri, 85 U.S. (18 Wall.) 409, 412 (1873). The Order exposes
banks to state-consumer-protection-law challenges that question the propriety of
certain interest charges by attacking the legality of the entire fee, even though
Congress intended that Section 86 provide the “exclusive cause of action” for such
challenges. See Beneficial Nat’l Bank, 539 U.S. at 10-11.
The Order also fails to adequately consider whether allowing states to
regulate the interest charges of a national bank would “significantly impair” a
national bank’s power to make and service loans. Barnett Bank, 517 U.S. at 34.
Congress gave national banks not only the power to lend money in exchange for
the promise of future payments, but also the power to determine the interest rate on
those loans and to service those loans. Congress expressly granted national banks
“all such incidental powers as shall be necessary to carry on the business of
banking,” including to “make, arrange, purchase or sell loans.” 12 U.S.C. §§ 24
(Seventh), 371. The regulations of the Office of the Comptroller of the Currency
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(“OCC”), the agency Congress charged with implementing the NBA, confirm that
national banks may “make, sell, purchase, participate in, or otherwise deal in
loans” without regard to state-law restrictions. 12 C.F.R. § 7.4008(a) (emphasis
added); see also 12 C.F.R. § 34.3(a) (same). These OCC regulations “have no less
pre-emptive effect than [the] statute[]” itself. Wachovia Bank, N.A. v. Burke, 414
F.3d 305, 314 (2d Cir. 2005) (internal citation and quotation marks omitted).
By empowering national banks to export interest charges that are lawful
under their home state, Congress and the OCC contemplated a secondary market
that enhances a national bank’s ability to make loans. Without a secondary market
for loans, national banks would be unable to liquidate assets and redeploy capital
when a loan goes into default. And if a bank could not export interest rates
according to its stipulated terms, the bank effectively would be crippled in
exercising its power to fully service the loan—especially if state laws deem the
original interest charges usurious. To prevent interstate confusion, the NBA
preempts any state law that would regulate the terms of loans originated by
national banks. See 12 C.F.R. §§ 7.4008(d), 34.4(a); OCC, Interpretive Letter
296, 1984 WL 63804 (July 19, 1984) (finding that state laws prohibiting due-on-
sale clauses in loan agreements are preempted as to national bank loan agreements
“regardless of whether the present holder of such loans is or is not a national
bank”)
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B. The Order Limits a National Bank’s Ability to Service and Sell
Loans.
The NBA allows national banks to service and sell loans in the secondary
market, permitting banks to efficiently move capital between consumers and
corporate borrowers, entities that would otherwise have difficulty transacting with
each other directly.1 This creates value for banks and improves the economy by
allocating funding to borrowers who value it most highly.2 Without a predictable
and efficient secondary market for loan assets, banks could not distribute credit as
efficiently or as extensively in the primary market.3
Likewise an efficient secondary market enables banks to manage financial
risk more effectively. “Banks may sell participations to enhance their liquidity,
interest rate risk management, and capital and earnings.” OCC, Credit Topics,
http://www.occ.gov/topics/credit/commercial-credit/loan-sales.html (last visited
July 18, 2015). For example, a bank that originates loans to borrowers nationwide
may accumulate a high concentration of loans in a specific state, and may wish to
1 Anthony Saunders and Marcia M. Cornett, Financial Institutions
Management: A Risk Management Approach, 3-5 (McGraw-Hill, 6th ed. 2008).
2 Id. at 3-10.
3 OCC, Comptroller’s Handbook, Loan Portfolio Management, 1 (Apr. 1998)
(hereinafter “OCC Handbook”) (“Efficient secondary markets can also reduce
costs to borrowers by increasing liquidity for loans and providing lenders with
access to a broader pool of capital.”).
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sell a portion of those loans to mitigate the negative impact an economic downturn
in that state would have on the bank’s overall portfolio.4 A bank also may wish to
sell distressed loans, both to manage its loan portfolio prudently and to fulfill
obligations to shareholders to maximize value. See OCC Bulletin 2014-37, Risk
Management Guidance (Aug. 4, 2014) (“In connection with charged-off loans,
banks have a responsibility to their shareholders to recover losses.”). A liquid and
efficient secondary market allows such transactions to proceed.
This also benefits consumers by generating more funds for national banks to
lend. National banks must adhere to strict requirements to maintain minimum
capital levels in proportion to their assets. See 12 C.F.R. pt. 3. The ability to
service and sell loans nationwide allows national banks to help consumers by
giving banks the ability issue more loans and expand the distribution of credit.
See, e.g., OCC Handbook, Loan Portfolio Management, supra note 3, at 9 (“A
secondary market for loans benefits originators, borrowers, and investors.”).
4 See Katerina Simons, Why Do Banks Syndicate Loans?, New England Econ.
Rev. 45. (Jan./Feb. 1993), available at
https://www.bostonfed.org/economic/neer/neer1993/neer193c.pdf (explaining that
a bank’s ability to put loans into the secondary market increases its lending
capacity and underwriting risk management considerations).
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This helps banks maintain financial viability, which enhances their ability to
provide credit efficiently and to allocate financial risk appropriately.5 The Order
undermines the liquidity and efficiency of the secondary market, because
according to the Order, the true value of the loan is contingent on the state
residency of the mortgagee or buyer rather than the value for which the parties
contracted at origination.6 If left uncorrected, the Order may significantly impair
national banks’ core powers to service and sell loans, with serious adverse
repercussions for loan origination, consumers, and the economy.7
5 See Rebecca Demesetz, Bank Loan Sales: A New Look at the Motivations
for Secondary Market Activity, 69 Fed. Reserve Bank of N.Y., 2 (Mar. 1999); see
also Blaise Gadanecz, The Syndicated Loan Market: Structure, Development and
Implications, BIS Quarterly Rev., 83-85 (Dec. 2004);
6 See Cong. Budget Office, Developing a Secondary Market for Small
Business Loans, 31 (Aug. 1994) (“Where secondary markets have arisen, the
process has been aided by financial innovations that enable investors to assess
accurately and easily the prospective returns from securities backed by a pool of
loans.”).
7 National banks play a preeminent role in the primary market for credit, i.e.,
in making loans. Indeed, data from the first quarter 2015 for all Federal Deposit
Insurance Corporation (“FDIC”) insured depositories show that national banks
account for almost or more than half of each of several major credit product classes
(real estate, commercial and industrial, credit card, and automobile). See FDIC,
Bank Data & Statistics, Mar. 31, 2015, https://www.fdic.gov/bank/ statistical/.
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C. The Order May Constrict Lending and Limit Consumers Access
to Credit.
By subjecting loans originated by national banks to state-law interest
limitations that would not otherwise apply, the Order may negatively affect the
value of national banks’ loans. The Order causes the value of national bank loans
to be contingent on factors other than the amount, timing, and risk of the
contracted-for cash flows. See OCC Handbook, Credit Card Lending, 3-11 (Mar.
1998) (discussing credit risk analysis and pricing based on risk). Meaning, the
contracted-for cash flows would not be forthcoming, causing the secondary
markets to freeze. See Yaron Leitner, Why Do Markets Freeze? Bus. Rev., Fed.
Reserve Bank of Philadelphia, 12-13 (2011).
Consequently, national banks may be dissuaded from specializing in loan
origination because the Order makes it more difficult for banks to sell their loan
production. See Leitner, supra, at 18 (noting that the prospect of selling loans off
for less than their market value will make banks “reluctant to lend”). National
banks may also find it more difficult to manage risk, as the market for loans with
certain geographic and financial characteristics—which can be used to balance
loans with other risk/return profiles—will become less liquid. Zvi Bodie et al.,
Investments 16 (McGraw-Hill, 8th ed. 2009) (observing that the ability to sell
loans to any region helps increase credit availability in a particular local region).
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CONCLUSION
For the foregoing reasons, this Court should reverse the district court’s
order.
Respectfully Submitted,
/s/ Thomas Pinder
Thomas Pinder
AMERICAN BANKERS ASSOCIATION
1120 Connecticut Ave. NW
Washington, DC 20036
(202) 663-7524
July 23, 2015 Counsel for Amici Curiae American
Bankers Association and
Consumer Bankers Association
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CERTIFICATE OF COMPLIANCE
1. This brief complies with the type-volume limitation of Fed. R. App. P.
29(d) and 32(a)(7)(B)(i) because this brief contains 2,230 words, excluding the
parts of the brief exempted by Fed. R. App. P. 32(a)(7)(B)(iii).
2. This brief complies with the typeface requirements of Fed. R. App. P.
32(a)(5) and the typestyle requirements of Fed. R. App. P. 32(a)(6) because this
brief has been prepared in a proportionally spaced typeface using Microsoft Word
2010 in 14-point Times New Roman.
/s/ Thomas Pinder
Thomas Pinder
AMERICAN BANKERS ASSOCIATION
1120 Connecticut Ave. NW
Washington, DC 20036
(202) 663-7524
July 23, 2015 Counsel for Amici Curiae American
Bankers Association and
Consumer Bankers Association
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CERTIFICATE OF FILING AND SERVICE
I, Thomas Pinder, certify that on July 23, 2015, I caused the foregoing Brief
of American Bankers Association and the Consumer Bankers Association as Amici
Curiae in Support of Appellant to be filed with the Clerk of Court for the U.S.
Court of Appeals for the Fourth Circuit by using the Court’s CM/ECF system,
which will cause a copy of the foregoing to be served on all counsel who have
entered an appearance in this action.
I further certify that on July 23, 2015, pursuant to 4th Cir. Rule 31(d)(1), I
caused 8 paper copies of the foregoing document to be delivered to the Clerk of
Court at the Lewis F. Powell Jr. Courthouse, 1100 East Main Street, Suite 501,
Richmond, VA 23219 via Federal Express, next-business-day service.
/s/ Thomas Pinder
Thomas Pinder
AMERICAN BANKERS ASSOCIATION
1120 Connecticut Ave. NW
Washington, DC 20036
(202) 663-7524
July 23, 2015 Counsel for Amici Curiae American
Bankers Association and Consumer
Bankers Association
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