On June 1, 2020, the Office of the Comptroller of the Currency (“OCC”) released a final rule on permissible interest on loans that are sold, assigned, or transferred, and effectively reversed the Second Circuit’s 2015 decision in Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015).[1]  In our post on the OCC’s advanced notice of proposed rulemaking (“ANPR”) from November 2019, we discussed how this holding contradicted the “valid when made” doctrine, whereby an obligation is considered valid under the law that applied at the time of origination.  Effectively, a loan’s interest rate was no longer valid when resold to an entity in a state with a lower interest rate cap than where the loan was originally issued.  This week’s final published rule is the first step in addressing the tension between the Second Circuit and the federal powers granted to national banks and federal thrifts.      

An example of the Madden glitch...
An example of a Madden glitch, and visual representation as to why a fix was needed.

Adopted in the form in which it was initially proposed, the OCC’s final rule provides that “[i]nterest on a loan that is permissible under sections 85 and 1463(g)(1), [national banks and federal thrifts] respectively, shall not be affected by the sale, assignment, or other transfer of the loan.”  Published in yesterday’s Federal Register and effective sixty days from now, the final rule reverses the Madden rule and reaffirms the “valid when made” doctrine.  Whereas the Madden decision held that subjecting credit assignees to state usury laws did not significantly interfere with the execution of a national bank’s powers, the OCC disagreed and viewed the decision as an affront to the inherent powers afforded to national banks.[2]  Credit lenders and others in the industry view the OCC final rule as an important and welcomed step in easing the uncertainty created by the Madden rule, citing the rule’s limiting of access to credit markets and propensity for instigating litigation. 

However, marketplace lenders should not write a eulogy for the Madden rule just yet.  In November 2019, both the OCC and the Federal Deposit Insurance Corporation (“FDIC”) issued ANPRs.  While based on different legal authority, the FDIC’s final rule remains unpublished and we are yet to see how the FDIC comes out on the “valid when made” doctrine.  Additionally, states that commented against the rule during the notice and comment period are likely to challenge the final rule in court, and courts will need to determine the level of deference to afford the OCC.  If litigation in these courts turns on preemption, courts will likely review the matters in light of the standard prescribed by Dodd-Frank, which is less deferential to OCC rulemakings.[3]  Private litigation relying on Madden will also shape how the marketplace, the courts, and the consumers, will assess the OCC’s final rule.  Each of these stakeholders will determine whether the final rule is the Madden fix we have been searching for.

As the OCC gains a deeper understanding of the impact of its guidance, it may offer further information and supervisory guidance related to permissible interest on loans that are sold, assigned, or transferred.  Entities may choose to consult directly with the prudential regulator when determining how their financial services products might impact consumers and the broader consumer financial services market.  We at BCLP have extensive experience helping consumer financial services providers manage the risks associated with interagency compliance.  We will continue to monitor developments in this area and would be happy to address your questions and concerns.   

[1]  Madden v. Midland Funding LLC, 786 F.3d 246 (2nd Cir. 2015).

[2]  See 12 U.S.C. 25b(f) (“No provision of title 62 of the Revised Statutes shall be construed as altering or otherwise affecting the authority conferred by section 85 for the charging of interest by a national bank at the rate allowed by the laws of the State, territory, or district where the bank is located, including with respect to the meaning of “interest” under such provision.”). 

[3]  See 12 U.S.C. § 25b(b)(5(A) (“A court reviewing any determinations made by the Comptroller regarding preemption of a State law . . . shall assess the validity of the reasoning of the agency, the consistency with other valid determination made by the agency, and other factors which the court finds persuasive and relevant to its decision.”).