On May 29, 2020, and June 25, 2020, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC), respectively, finalized rules addressing permitted interest rates on bank loans that are subsequently sold, assigned, or otherwise transferred to non-banks. The rule puts to rest challenges to the “valid when made” doctrine that arose from a contrary decision in 2015 by the United States Court of Appeals for the Second Circuit in Madden v. Midland Funding, LLC. [1]
Under the common law “valid when made” doctrine, a loan that was valid when made, charging a particular rate of interest, remains valid with respect to that interest rate, regardless of any subsequent transfers. [2] While this was generally understood to be settled law, [3] the Second Circuit’s decision in Madden cast doubt on this long-held view by holding that non-banks are not entitled to the same protections available to banks with respect to loans that would otherwise be subject to state law usury claims. This holding meant that, with respect to bank loans with interest rates above state law limits, such loans might not remain valid if transferred to non-banks.
The OCC and FDIC rules reaffirm the “valid when made” doctrine, providing that an interest rate on a bank loan that is permissible when the loan is made continues to be permissible after transfer to a non-bank. The new rules were issued explicitly to resolve the issues wrought by Madden. The securitization market is a primary beneficiary of these fixes. On the heels of Madden, securitizations involving bank debt—like securitization trusts and credit card securitizations—were challenged in other jurisdictions, based on similar usury-violation arguments.[4] With explicit responses from both the OCC and the FDIC putting to rest the uncertainty created by the Madden decision, it’s expected that courts will give deference to these new rules and similar lawsuits challenging the “valid when made” doctrine will have dimmed prospects going forward. The rule also reverses the potential negative impact Madden had on bank loan portfolios, due to concerns about transferability in secondary markets.
- Madden v. Midland Funding, LLC, 786 F.3d 246 (2nd Cir. 2015). [Back to reference]
- Nichols v. Fearson, 32 U.S. (7 Pet.) 103, 109 (1833).[Back to reference]
- Permissible Interest on Loans that are Sold, Assigned, or Otherwise Transferred, p18-19.[Back to reference]
- See Petersen v. Chase Card Funding, LLC (No. 1:19-cv-00741-LJV (W.D.N.Y. filed June 6, 2019)), Cohen v. Capital One Funding, LLC (No. 1:19-cv-03479-KAM-RLM (E.D.N.Y. filed June 12, 2019)), Meade v. Marlette Funding LLC (No. 2017-CV-30376 (Colo. Dist. Ct.)), and Meade v. Avant of Colorado LLC (No. 2017-CV-30377 (Colo. Dist. Ct.)).[Back to reference]