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OCC Releases Final Rule on Permissible Interest Rates, Addressing Madden Debate

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  Effectively, a loan’s interest rate was no longer valid when resold to an entity in a state with a lower interest rate cap than where the loan was originally issued.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. 

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OCC and FDIC Clarify the “Valid When Made” Debate

On November 18 and 19 of this week, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation issued Advanced Notices of Proposed Rulemaking (ANPRs) to clarify how state interest rate caps should apply when loans are sold across state lines.

Example of a Madden Glitch

The proposal from the OCC reaffirms the “valid when made” doctrine, on which many marketplace lenders have relied and which was central to the Second Circuit’s 2015 decision in Madden v. Midland Funding LLC, 786 F.3d 246 (2nd Cir. 2015). The Second Circuit’s decision contradicted the “valid when made” theory, whereby an obligation is considered valid under the law that applied at the time of origination. The Second Circuit held that 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. In its proposed rule, the OCC “has concluded that when a bank sells, assigns, or otherwise transfers a loan, interest permissible prior to the transfer continues to be permissible following the transfer.” The OCC’s proposed rule would cut against Madden, allowing the interest rates attached to bank loans to remain valid once transferred to a bank’s fintech partner of investors.

The FDIC’s proposed rule parallels that of the OCC, but focuses on Madden’s relation to state-chartered banks. The FDIC’s proposed rule clarifies that the legal interest rate on a loan originated by a state bank remains legal even after the loan is sold to a non-bank. Speaking in a statement on Tuesday, FDIC Chairwoman Jelena McWilliams said “This proposed rule would correct the anomaly by establishing in regulations … that the permissibility of interest would be determined when a loan is made and is not impacted by subsequent assignment, sale, or transfer.” The draft regulations issued on Tuesday by the FDIC affirm that state banks are not bound by the interest rate caps of other states in which they operate. Further, the validity of the loans’ interest rates would be fixed at the time of origination.

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