United States Court of Appeals

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1 Appeal: Doc: 20-1 Filed: 07/23/2015 Pg: 1 of 19 No IN THE United States Court of Appeals FOR THE FOURTH CIRCUIT Jeremy Powell and Tina Powell, v. Plaintiffs-Appellees, 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 (202) Of Counsel Thomas Pinder AMERICAN BANKERS ASSOCIATION 1120 Connecticut Ave. NW Washington, DC (202) Counsel for Amici Curiae July 23, 2015

2 Appeal: Doc: 20-1 Filed: 07/23/2015 Pg: 2 of 19 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 (202) July 23, i -

3 Appeal: Doc: 20-1 Filed: 07/23/2015 Pg: 3 of 19 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 B. The Order Limits a National Bank s Ability to Service and Sell Loans C. The Order May Constrict Lending and Limit Consumers Access to Credit CONCLUSION...11 CERTIFICATE OF COMPLIANCE...12 CERTIFICATE OF FILING AND SERVICE ii -

4 Appeal: Doc: 20-1 Filed: 07/23/2015 Pg: 4 of 19 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 U.S.C U.S.C Regulations 12 C.F.R. pt iii -

5 Appeal: Doc: 20-1 Filed: 07/23/2015 Pg: 5 of C.F.R (a) C.F.R (d) C.F.R. 34.3(a) 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, statistical/... 9 OCC Bulletin , Risk Management Guidance (Aug. 4, 2014)... 8 OCC, Comptroller s Handbook (Apr. 1998)... 7, 8, 10 OCC, Credit Topics, (last visited July 18, 2015)... 7 OCC, Interpretive Letter 296, 1984 WL (July 19, 1984)... 6 Office of Thrift Supervision, Op. Letter No. P , 2003 WL (July 22, 2003)... 4 Anthony Saunders and Marcia M. Cornett, Financial Institutions Management: A Risk Management Approach, 3-5 (McGraw-Hill, 6th ed. 2008) Blaise Gadanecz, The Syndicated Loan Market: Structure, Development and Implications, BIS Quarterly Rev., (Dec. 2004)... 9 Katerina Simons, Why Do Banks Syndicate Loans?, New England Econ. Rev. 45. (Jan./Feb. 1993), available at 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) iv -

6 Appeal: Doc: 20-1 Filed: 07/23/2015 Pg: 6 of 19 Yaron Leitner, Why Do Markets Freeze? Bus. Rev., Fed. Reserve Bank of Philadelphia, (2011)... 9 Zvi Bodie et al., Investments (McGraw-Hill, 8th ed. 2009) v -

7 Appeal: Doc: 20-1 Filed: 07/23/2015 Pg: 7 of 19 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, (1996); Franklin Nat. Bank of Franklin Square v. New York, 347 U.S. 373, (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 - 1 -

8 Appeal: Doc: 20-1 Filed: 07/23/2015 Pg: 8 of 19 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

9 Appeal: Doc: 20-1 Filed: 07/23/2015 Pg: 9 of 19 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

10 Appeal: Doc: 20-1 Filed: 07/23/2015 Pg: 10 of 19 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 WL (July 22, 2003) (noting the general principle that loan terms should not change simply because an originator entitled to federal - 4 -

11 Appeal: Doc: 20-1 Filed: 07/23/2015 Pg: 11 of 19 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 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 - 5 -

12 Appeal: Doc: 20-1 Filed: 07/23/2015 Pg: 12 of 19 ( 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 (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 (d), 34.4(a); OCC, Interpretive Letter 296, 1984 WL (July 19, 1984) (finding that state laws prohibiting due-onsale 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 ) - 6 -

13 Appeal: Doc: 20-1 Filed: 07/23/2015 Pg: 13 of 19 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, (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 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. )

14 Appeal: Doc: 20-1 Filed: 07/23/2015 Pg: 14 of 19 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 , 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 (explaining that a bank s ability to put loans into the secondary market increases its lending capacity and underwriting risk management considerations)

15 Appeal: Doc: 20-1 Filed: 07/23/2015 Pg: 15 of 19 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., (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, statistical/

16 Appeal: Doc: 20-1 Filed: 07/23/2015 Pg: 16 of 19 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, (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)

17 Appeal: Doc: 20-1 Filed: 07/23/2015 Pg: 17 of 19 order. CONCLUSION For the foregoing reasons, this Court should reverse the district court s Respectfully Submitted, /s/ Thomas Pinder Thomas Pinder AMERICAN BANKERS ASSOCIATION 1120 Connecticut Ave. NW Washington, DC (202) July 23, 2015 Counsel for Amici Curiae American Bankers Association and Consumer Bankers Association

18 Appeal: Doc: 20-1 Filed: 07/23/2015 Pg: 18 of 19 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 (202) July 23, 2015 Counsel for Amici Curiae American Bankers Association and Consumer Bankers Association

19 Appeal: Doc: 20-1 Filed: 07/23/2015 Pg: 19 of 19 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 via Federal Express, next-business-day service. /s/ Thomas Pinder Thomas Pinder AMERICAN BANKERS ASSOCIATION 1120 Connecticut Ave. NW Washington, DC (202) July 23, 2015 Counsel for Amici Curiae American Bankers Association and Consumer Bankers Association