IN THE UNITED STATES COURT OF...Steven I. Zeisel CONSUMER BANKERS ASSOCIATION 1225 Eye St. NW, Suite 550 Washington, DC 20005 (202) 552-6363 Of Counsel Thomas Pinder AMERICAN BANKERS

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


(202) 663-7524

Counsel for Amici Curiae

July 23, 2015

Appeal: 15-1618 Doc: 20-1 Filed: 07/23/2015 Pg: 1 of 19

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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



(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




(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




(202) 663-7524


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




(202) 663-7524


Bankers Association and Consumer

Bankers Association


Documents

IN THE UNITED STATES COURT OF...Steven I. Zeisel CONSUMER BANKERS ASSOCIATION 1225 Eye St. NW, Suite 550 Washington, DC 20005 (202) 552-6363 Of Counsel Thomas Pinder AMERICAN BANKERS