Though a legal concept in existence in our nation’s jurisprudence for more than two hundred years, “valid when made” continues to be a heated topic of debate. Such controversy is to be expected given the treatment (or nontreatment) of this concept in Madden v. Midland Funding, LLC. In Madden, the U.S. Court of Appeals for the Second Circuit—which includes Connecticut, New York, and Vermont—held that non-national bank entities that purchase loans originated by national banks cannot rely on the National Bank Act (NBA) to protect them from state-law usury claims. The decision in Madden undermined the valid-when-made theory on which assignees of loans originated by banks relied for many years. Madden also impeded the ability of national banks to sell the loan obligations they originate, thus reducing their ability to lend. Although Madden was argued under the NBA, its reasoning also applied to state chartered banks. The Madden effect has shown up in a few lawsuits over the last few years, and a recent development is ramping up the pressure on the bank partner model by suing the trusts that are typically created to hold the assets originated by the bank. Although most of the originating banks in the bank partnership space are state-chartered banks, the trustees involved on the back-end are national banks, as national banks enjoy broader preemption authority than their state counterparts.

Originally published in The Consumer Finance Law Quarterly Report, 2019, Vol. 73, No. 4.