Bank Regulators Propose Fix to Madden Problem

Last week, the Office of the Comptroller of the Currency (OCC) and Federal Deposit Insurance Corporation (FDIC) each issued a proposed rule designed to clarify that interest rates that are valid when a loan is made remain valid when the loan is transferred or sold.  Together, the proposed rulemaking would codify the “valid when made” doctrine that was called into question after the Second Circuit’s 2015 decision Madden v. Midland Funding LLC.  LenderLaw Watch previously reported on the Madden decision after it was issued four years ago.

Here is Goodwin’s summary, published in its November 20, 2019 Financial Services Weekly News Roundup, of the regulators’ proposed rules issued in response to that decision:

*Editor’s Note:  This post originally appeared on Goodwin’s Financial Services Weekly News Roundup.  Goodwin attorneys Matt Dykman, Nicole Griffin, Josh Burlingham and Stephen Shaw contributed to the article.

OCC and FDIC Propose Rules to Fix Madden Problem

On November 18 and 19, respectively, the OCC and FDIC each issued a proposed rule designed to clarify that interest rates valid when a loan is made remain valid when the loan is transferred or sold.  This “valid-when-made” doctrine, a longstanding common-law principle, was called into question by the U.S. Court of Appeals for the Second Circuit’s 2015 decision in Madden v. Midland Funding, LLC, which held that a nonbank buyer of a loan originated by a national bank could not export the originated interest rate because it violated state law where the borrower lived.

In order to “address recent confusion about the impact of an assignment on the permissible interest resulting from the Madden case,” the OCC proposal would amend 12 CFR 7.4001 and 12 CFR 160.110 by adding a new paragraph, which would provide that interest on a loan that is permissible under Sections 85 and 1463(g)(1) of the National Bank Act shall not be affected by the sale, assignment, or other transfer of the loan.  The FDIC proposal would establish a new regulation, 12 CFR Part 331, which would implement Sections 24(j) and 27 of the Federal Deposit Insurance Act (FDIA) and provide that (1) the permissibility of interest on a loan under Section 27 of the FDIA would be determined at the time the loan is made and (2) interest on a loan permissible under Section 27 would not be affected by subsequent events, such as a change in state law, a change in the relevant commercial paper rate, or the sale, assignment, or other transfer of the loan.  The FDIC also published a fact sheet in connection with its proposal.  Together, the proposals would codify the “valid-when-made” doctrine for national banks, federal and state savings associations, and state chartered banks.

Each proposed rule explicitly states that it does not address which entity is the true lender when a bank makes a loan and assigns it to a third party.  However, the FDIC’s proposed rule stated that “the FDIC views unfavorably entities that partner with a state bank with the sole goal of evading a lower interest rate established under the law of the entity’s licensing state.”

Comments on the proposed rules will be accepted for 60 days after publication in the Federal Register.

 

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