The Office of the Comptroller of the Currency (“OCC”) adopted a final rule on June 2, 2020 that clarifies that when a bank transfers a loan, the interest permissible before the transfer continues to be permissible after the loan is transferred, a doctrine referred to as “valid when made.” This rule codifies a rulemaking initially proposed in November 2019. The rule will go into effect 60 days after publication in the federal register.

As the OCC explained, national banks have broad authority to engage in the business of banking, specifically, the National Bank Act (“NBA”) provides national banks with the ability to lend money, and “all such incidental powers as shall be necessary to carry on the business of banking.” 12 U.S.C. § 24 and 371. National banks also have the ability to transfer their loans. Id. Further, the NBA permits national banks to enter into contracts, and a corollary to that right is the power to assign some or all of the benefits of that contract to a third party. Based on these powers, the OCC concluded that when a bank transfers a loan that it made, the interest permissible on the loan at the time it was made continues to be permissible following the transfer.

The rulemaking by the OCC is a response to the 2015 Madden vs. Midland Funding[1] case which questioned the “valid when made” doctrine. In that case, the Second Circuit determined that purchasers of bank-originated loans are not subject to the protections of the NBA and such purchasers would be subject to state usury laws that would be otherwise preempted by the NBA.

The rule (often referred to as the “Madden fix”) is seen as a success for investors in the secondary market for bank-originated loans, as the rule provides much needed clarity as to whether a secondary purchaser of a bank-originated loan could charge the interest rates permissible for the bank-originator. However, the rulemaking does not address the closely related “true lender” issue for situations where state attorneys general and other state actors assert that the bank that originated the loan is not the “true lender” and instead the non-licensed partner who purchases the loan should be treated as the lender-in-fact. Under the “true lender” challenge, the matter of “valid when made” is not at issue because the partner was not in fact provided with protection in the first place.

The OCC received over sixty comments to the proposed rule, many from state attorneys general and consumer advocacy groups. These commenters argued and continue to argue that this rulemaking is inconsistent with the OCC’s authority under the NBA. These continued discussions and the continued existence of true lender actions provide fertile ground for continued litigation over this rule and the viability of a secondary market for bank-originated loans.

For now, the rule promotes additional certainty about the legality of certain interest rates following the sale or assignment of bank-originated loans. As Acting Comptroller of the Currency Brian Brooks explained, “[t]he rule supports the orderly function of markets and promotes the availability of credit by answering the legal uncertainty created by the Madden decision…” and “[s]uch certainty allows secondary markets to work efficiently and to serve their essential role in the business of banking and helping banks access liquidity and alternative funding, improve financial performance ratios, and meet customer needs.”