On May 29, 2020, the OCC issued a final rule on permissible interest on loans that are sold, assigned, or otherwise transferred.
While national banks are permitted to charge interest at the maximum rate permitted by the states in which the originating bank is located, and while those banks are also permitted to sell or transfer loans to banks or investors in other states, there has been legal uncertainty with regard to the maximum interest rate allowable on the loan where a loan is transferred to a bank located in a state with a lower maximum interest rate law than the state where the originating bank was located.
The new rule “clarifies that when a bank [or savings association] transfers a loan, the interest permissible before the transfer continues to be permissible after the transfer.” In other words, “the usurious or non-usurious character of a contract endures through assignment.” This concept is known as the “valid when made” principle. The OCC was quick to point out that the inverse, “invalid when made,” still holds true, meaning that if the loan was usurious at inception in the state of the loan origination, it will remain usurious despite any transfers. Importantly, the rule applies regardless of the status of the assignee. Therefore, “[u]pon assignment, the third-party assignee steps into the shoes of the national bank and may enforce the rights the bank assigned to it under the contract.”
This new final rule expressly addresses the legal uncertainty stemming from the Second Circuit’s ruling in Madden v. Midland Funding. In that case, the Second Circuit held that a California non-bank purchaser of a Delaware bank-originated debt to a New York borrower, which involved a debt instrument specifying that Delaware law should apply, was subject to New York State’s usury laws. 786 F.3d 246, 250-51 (2d Cir. 2015). This decision ran counter to the valid when made principle since under Delaware law the interest rate was not usurious.
The new final rule should give lenders and investors comfort that their ability to freely sell, transfer, and purchase loans without worrying about application of state-specific interest rate and usury laws that might apply to the acquiring bank or other loan purchaser. The OCC’s Acting Comptroller, Brian Brooks, expressed hope that this clarification and reaffirmation will assist with banks’ ability to provide credit to consumers and businesses during these “times of economic stress.”
The OCC noted that some commenters feared that this rule encourages “rent-a-charter” relationships which allow banks to evade state usury laws enacted to protect consumers. The OCC rejected this conclusion and stated that the agency opposes predatory lending, and that the banks still must comply with the state law interest rate caps wherever the initiating bank is located.
The final rule will take effect 60 days after its publication in the Federal Register.
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All quotations are from the Federal Register Notice, published by the Department of the Treasury, Office of the Comptroller of the Currency, 12 CFR Parts 7 and 160, [Docket ID OCC-2019-0027], RIN 1557-AE73, “Permissible Interest on Loans that are Sold, Assigned, or Otherwise Transferred.”
