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OCC and FDIC Issue NPRMs to Fix Madden, and Clarify the Validity of the ‘Valid When Made’ Doctrine

The Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) both recently issued proposed rules to “fix” the potential problems arising from the ruling in Madden v. Midland Funding, LLC, 786 F.3d 246 (2nd Cir. 2015), which called into question the “valid when made” doctrine.

In addition, the FDIC’s proposal would make clear that the permissible interest on a loan would be determined at the time the loan is made, regardless of subsequent events such as changes in state law or the sale or assignment of the loan.

The OCC’s Notice of Proposed Rulemaking is available at:  Link to OCC’s NPRM.

The FDIC’s Notice of Proposed Rulemaking is available at:  Link to FDIC’s NPRM.

As you may recall, federal law allows national banks and federal savings associations to charge interest at the “most favored lender” rate — i.e., the maximum rate permitted to any state-chartered or licensed lending institution in the state where the bank is located — and authorizes national banks and federal savings associations to make, purchase, and sell loans.

FDIC-insured state banks have parallel rights under other federal law.

However, as we reported in our prior update, the U.S. Court of Appeals for the Second Circuit in Madden essentially held that loans that are completely legal when made by a national bank subsequently become illegal if the national bank sells or assigns them to a non-national bank purchaser or assignee.

According to the Second Circuit, the federal banking laws only preempt state usury laws as long as the loan remains in the hands of a national bank, but not if the loan is subsequently sold or assigned to an entity that is not a national bank or a person collecting interest for a national bank.

This meant that the loan purchaser defendant in the Madden case, which was not a national bank, violated the federal Fair Debt Collection Practices Act by charging illegal interest on the loans it purchased from national banks.

The Supreme Court of the United States subsequently denied the defendant’s petition for a writ of certiorari in June of 2016.  This essentially allowed the Madden ruling to stay in effect.

The OCC states that its proposed rule “would clarify that when a bank sells, assigns, or otherwise transfers a loan, interest permissible prior to the transfer continues to be permissible following the transfer.”

Likewise, the FDIC’s proposed rule “would provide that State banks are authorized to charge interest at the rate permitted by the State in which the State bank is located, or one percent in excess of the ninety-day commercial paper rate, whichever is greater.”

The FDIC’s proposed rule would also “provide that whether interest on a loan is permissible [federal law] would be determined at the time the loan is made, and interest on a loan permissible under section 27 would not be affected by subsequent events, such as a change in State law, a change in the relevant commercial paper rate, or the sale, assignment, or other transfer of the loan.”

Comments are due on or before the date that is 60 days after publication of the proposals in the Federal Register, which is expected imminently.

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Ralph Wutscher's practice focuses primarily on representing consumer and commercial financial services companies, including depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, financial asset buyers and sellers, loss mitigation companies, third-party debt collectors, and other financial services providers. He represents the lending and financial services industry as a litigator, and as regulatory compliance counsel. For more information, please see: http://mauricewutscher.com/attorneys/ralph-t-wutscher/.

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