United States: Bank Regulators Clarify The "Valid-When-Made" Doctrine

On November 18, 2019, the Office of the Comptroller of the Currency ("OCC") and the Federal Deposit Insurance Corporation ("FDIC") issued proposed rules ("Proposed Rules") that reaffirm the "valid-when-made" doctrine in response to ambiguities raised by the Second Circuit Court of Appeals' decision in Madden v. Midland Funding, LLC, 786 F.3d 246 (2nd Cir. 2015). Comments on the Proposed Rules will be accepted until 60 days following the Proposed Rules' publication in the Federal Register.

The National Bank Act and Federal Deposit Insurance Act provide that a bank is permitted to charge the maximum interest rate permissible in the state where it is located. The "valid-when-made" doctrine is a long-standing common law doctrine providing that bank loans carrying interest rates that are valid when made under applicable federal law remain valid with respect to that rate, regardless of whether a bank has subsequently sold or assigned the loan to a third party. See, Nichols v. Fearson, 32 U.S. (7 Pet.) 103, 109 (1833). The Second Circuit's decision in Madden calls into question the "valid-when-made" doctrine. Specifically, the court held that a credit card loan originated by a bank located in Delaware that was assigned to a third-party debt collector violated New York usury law, despite the fact that the interest rate charged was permissible under Delaware law when the loan was originated.

The OCC and FDIC believe that Madden diminishes the value and liquidity of bank loan portfolios and negatively impacts safety and soundness. Accordingly, the Proposed Rules seek to codify the "valid-when-made" doctrine as part of the OCC's and FDIC's regulations. Although the OCC's Proposed Rule does not address issues regarding true lender status when a bank makes a loan and assigns it to a third party, the FDIC's Proposed Rule states that the FDIC views unfavorably entities that partner with a state bank with the sole goal of evading usury laws.

Read the full text of the OCC's Proposed Rule and the FDIC's Proposed Rule.

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