Following Suit – FDIC Finalizes Rule Reaffirming “Valid When Made” Doctrine for State Banks

On June 25, 2020, following the OCC’s lead, the Federal Deposit Insurance Corporation’s (FDIC) board of directors voted 3-1 to finalize a rule that reaffirms the “valid when made” doctrine as applicable to loans originated by state-chartered banks and insured branches of foreign banks. The FDIC believes that reaffirmation of a state bank’s ability to assign loans at the contractual interest rate will make state-bank loans more marketable, mitigate the potential for future secondary-market disruption, and maintain parity between national banks and state banks with respect to interest rate exportation.

In addressing comments received on the December 2019 proposed rule, the FDIC refuted arguments that the rule exceeds the FDIC’s authority by regulating non-banks or establishing permissible interest rates for non-banks. Specifically, the FDIC asserted that the final rule “would not become a regulation of assignees simply because it would have an indirect effect on assignees.” In other words, the FDIC clarified that it does not view the promulgation of the final rule as the regulation of non-banks that may subsequently purchase a loan from a state bank.  The FDIC also addressed arguments that it lacked the authority to prescribe the effect of the assignment of a state bank loan because the statutory provisions for state banks’ preemptive authority does not expressly refer to the “assignment” of a state bank loan. However, relying on the Chevron doctrine, the FDIC asserted that the statute’s silence “reinforces the FDIC’s authority to issue interpreting regulations to clarify an aspect of the statute that Congress left open.” 

The FDIC also dismissed claims that the rule would facilitate predatory lending, asserting that these claims “arise from perceived abuses of longstanding statutory authority” rather than from the rule. The FDIC characterized the rule as reinforcing the longstanding status quo regarding the enforceability of interest rate terms on loans made by a state bank that are subsequently transferred. In response to concerns that the rule would encourage “rent-a-bank” arrangements, the FDIC emphasized that the rule does not address “true lender” issues or affect licensing and regulatory requirements that apply to banks and non-banks under state laws.

The final rule becomes effective 30 days after publication in the Federal Register.