Fintech in Brief: OCC Issues Final ‘Valid When Made’ Rule on Permissible Interest on Transferred Loan

Nutter McClennen & Fish LLP
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On May 29, 2020, the Office of the Comptroller of the Currency (the “OCC”) issued a final rule (the “Rule”) confirming the validity of interest rates on bank loans transferred to third parties, including fintech affiliates. The Rule clarifies the OCC’s longstanding view that a bank may transfer a loan without impacting the permissibility or enforceability of the loan’s interest term. This interpretation is grounded in the National Bank Act (the “NBA”), which empowers banks to lend money and transfer loans. While the NBA does not explicitly address whether transferring a loan impacts that loan’s interest rate, the OCC interprets Section 85 of the NBA to provide “that when a bank transfers a loan, interest permissible before the transfer continues to be permissible after the transfer.”

The Rule is intended to clarify legal uncertainty caused by Madden v. Midland Funding, LLC, a 2015 ruling in the U.S. Court of Appeals for the Second Circuit which held that the NBA did not preempt state usury laws where the transferee of a loan was not a national bank. Acting Comptroller Brian P. Brooks said in a statement that the Rule resolves the legal uncertainty created by Madden and “allows secondary markets to work efficiently and to serve their essential role in the business of banking.” These secondary markets include fintechs that acquire loans through partnerships with banks. Such fintech partners or other subsequent acquirees can rely on the Rule to continue to charge borrowers the interest rate initially attached to the loan for now. The Rule may still be subject to legal challenges arguing that the Rule is inconsistent with the OCC’s authority under the NBA, as multiple state attorneys general (including in New York, California, and Illinois) argued in comments to the proposed rule. Importantly, this final rulemaking will strengthen the OCC’s defense to any such challenge.

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