Madden Put to Rest? – OCC Finalizes Rule Reaffirming “Valid When Made” Doctrine

On May 29, 2020, the Office of the Comptroller of the Currency (OCC) finalized a rule that reaffirms the “valid when made” doctrine applicable to loans originated by a national bank. According to Acting Comptroller of the Currency Brian Brooks, the final rule “clarif[ies] that a bank may transfer a loan without affecting the legally permissible interest term[]” and “supports the orderly function of markets and promotes the availability of credit by answering the legal uncertainty created by the ‘Madden’ decision.” The OCC believes that the legal uncertainty caused by the decision of the U.S. Court of Appeals for the Second Circuit in Madden v. Midland Funding, LLC “may disrupt banks’ ability to serve consumers, businesses and the broader economy efficiently and effectively.”

The final rule amends the OCC’s regulations to codify its position that when a national bank or savings association sells, assigns or otherwise transfers a loan, interest on a loan that is permissible before the transfer continues to be permissible after the transfer. In addressing comments received on the November 2019 proposed rule, the OCC rejected arguments that the OCC did not have authority to issue the rule citing to the National Bank Act (NBA), and Congress’ “conspicuous” silence on a national bank’s authority to transfer a loan and assign the loan contract without affecting the interest rate. The OCC took the position that the Chevron doctrine allows it to interpret the silence under the NBA, and it was appropriate to resolve the silence by providing that when a bank transfers a loan, interest permissible before the transfer continues to be permissible after the transfer.

The OCC also dismissed arguments from commenters that the rule would facilitate predatory lending by promoting rent-a-charter arrangements between banks and nonbanks. The OCC reaffirmed its “strong” opposition to predatory lending, and highlighted its guidance on managing third party relationships.

The final rule becomes effective 60 days after publication in the Federal Register. Notably, the Federal Deposit Insurance Corporation, which issued a similar proposal around the same time that the OCC issued its proposed rule in November 2019, has not yet finalized its rule, which would apply to state banks.