After Madden, OCC and FDIC Propose to Reaffirm “Valid When Made” Rule

On November 18, 2019, the Office of the Comptroller of the Currency (OCC) took action to reaffirm the “valid when made” doctrine in response to the uncertainty on the validity of interest rates of bank-originated loans sold in the secondary market after the 2015 decision by the U.S. Court of Appeals for the Second Circuit in Madden v. Midland Funding LLC (Madden). The OCC issued a notice of proposed rulemaking to clarify that when a bank sells, assigns, or otherwise transfers a loan, the interest permissible prior to the transfer would continue to be permissible following the transfer. The long-recognized, common law principle “valid when made” provides that loan terms that are valid when made remain valid loan terms until the loan is satisfied or forgiven, irrespective of whether, or to whom, the loan is sold. The OCC’s proposed rule would make it explicit that the terms of permissible loans will not be affected by the sale, assignment, or other transfer of those loans. While the proposed rule would expressly codify what the OCC says it has always believed about the impact of an assignment on the permissible interest, the proposed rule would not address which entity is the “true lender” when a bank makes a loan and assigns or sells the loan or receivables to a third party. Therefore, recent cases finding that the party with the “predominant economic interest” is the “true lender” could continue to create uncertainty for marketplace lenders or others in the secondary market.  

To maintain parity between national banks and state banks with respect to interest rate authority, on November 19, 2019, the Federal Deposit Insurance Corporation (FDIC) issued a notice of proposed rulemaking seeking to reaffirm the authority for assignees of loans originated by state banks to enforce the contractual interest-rate terms of those loans. Like the OCC, the FDIC also does not address the “true lender” question; however, the FDIC specified that “it will view unfavorably entities that partner with a [s]tate bank with the sole goal of evading a lower interest rate established under the law of the entity’s licensing [s]tate(s).”

Both  proposed rules follow Congressional inaction on federal “Madden fix” legislation, despite a July 2018 report by the Department of Treasury recommending that Congress codify the “valid when made” doctrine. The proposed rules by the OCC and the FDIC are an important development given that plaintiffs and state regulators have relied upon or cited the 2015 Madden ruling when seeking to challenge marketplace lending arrangements or other traditional secondary market loan sales. The OCC’s proposed rule would apply to all national banks and state and federal savings associations, and the FDIC’s proposed rule would extend this parity to state banks. Comments are due within 60 days after publication in the Federal Register; the OCC’s proposed rule is anticipated to be published on November 21, 2019.