On May 29, 2020, the Office of the Comptroller of the Currency (OCC) issued a long-awaited final rule to clarify and underscore the 'valid when made' principle in which the interest rates permissible before a bank transfers a loan continues to be permissible after the transfer to a non-bank.
Generally, under the National Bank Act (NBA), national banks chartered by the OCC have the power to make contracts, lend money, and all incidental powers necessary to carry out the business of banking. Regarding interest, the NBA requires a national bank to comply with the interest rate caps of the state where the national bank is located. Under the longstanding 'valid when made' rule, upon the transfer or assignment of a loan, the terms of the debt, including the interest rate and any preemption protection under the NBA, remained intact and valid through maturity no matter who the purchaser was or where the purchaser was located.
However, in 2015, the Second Circuit invalidated the 'valid when made' principle when it came to non-bank purchasers of debt from national banks. In Madden v. Midland Funding LLC, 786 F.3d 246 (2d Cir. 2015), the Second Circuit held that, upon transfer to a non-bank third party debt collector, loans originated by a national bank were not entitled to the NBA's preemption protections. Instead, Madden effectively invalidated the 'valid when made' rule so that purchasers of debt from national banks were exposed to state-law usury claims where interest rates on purchased debt exceeded state law usury limits with other implications on the transfer of debt between national banks and other entities.
At the urging of Congress, U.S. Department of Treasury, and U.S. Department of Justice to codify the 'valid when made' rule, the OCC issued a notice of proposed rule on November 19, 2019 in an effort to clear up confusion following the impact of Madden even in states where the decision did not directly apply. In a letter to the OCC, members of the House Financial Services Committee noted the uncertainty caused by Madden on national banks who partner with non-bank fintech firms to provide credit to consumers and the risk to liquidity of financial institutions if other circuits followed suit. Similarly, in its 2018 report to the President, the Treasury Department discussed that Madden's implications could reach beyond non-depository marketplace lenders and possibly diminish access to credit.
Accordingly, the OCC issued a final rule interpreting the NBA to include loan transfers as within the fundamental aspects of the business of banking so that interest rates are valid regardless of whether the loan is sold or transferred to a non-bank purchaser. The rule clarifies the legal uncertainty created by Madden where non-banks would have been subject to usury regulations on a state-by-state basis and attempts to reverse any adverse effects of Madden on financial institutions' access to liquidity and alternative funding. Notwithstanding this legal clarity, Rep. Maxine Waters (D-CA) expressed her concern in a statement of the final rule's authorization to export high interest rates across the country without state oversight. However, the OCC's Final Rule notes that national banks are still subject to the usury regulations of the state in which they are located. Ultimately, the OCC's Final Rule is aimed at resolving the legal uncertainty following Madden and should ease pressure on national banks to originate loans without ambiguity about whether the loans may be transferred or assigned with the same terms to non-bank entities, particularly as economic growth remains uncertain.
The rule will take effect after 60 days of publication in the Federal Register.
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