Banking and Finance Law Daily OCC finalizes ‘Valid When Made’ rule for bank loan interest rates
Monday, June 1, 2020

OCC finalizes ‘Valid When Made’ rule for bank loan interest rates

By Colleen M. Svelnis, J.D.

The OCC has amended two regulations to clarify that banks may sell loans that allow the buyers to collect interest at rates that otherwise would violate state usury laws.

The Office of the Comptroller of the Currency has clarified that when a national bank or savings association sells, assigns, or otherwise transfers a loan, interest permissible before the transfer continues to be permissible after the transfer. The OCC has amended two regulations, one for banks and the other for thrifts, to say that the interest rate that is permissible under federal law would not become usurious if the loan were sold to another creditor. The final rule is intended to end uncertainty by clarifying that when a bank assigns a loan, interest permissible prior to the assignment will continue to be permissible following the assignment. The final rule takes effect Aug. 3, 2020.

The OCC proposed, in November 2019 to amend 12 CFR 7.4001 and 12 CFR 160.110 by adding a new paragraph, which would provide that interest on a loan that is permissible under 12 U.S.C. §85 and 12 U.S.C. §1463(g)(1), will not be affected by the sale, assignment, or other transfer of the loan. The OCC has adopted the rule as proposed. The Federal Deposit Insurance Corporation is also expected to finalize its similar proposal, which would add a new 12 CFR Part 331, titled Federal Interest Rate Authority.

Federal law allows a national bank or federal savings association to charge whatever interest rate is permitted by the law of its home state, regardless of where the borrower is located. This often is described as the ability to export that interest rate. The "valid when made" principle says that an interest rate that was legal when the loan was made remains legal, even if the loan subsequently is sold to a nonbank. This allows a bank to extend credit and then sell the loan to a nonbank that will retain the benefit of the exported interest rate.

Second Circuit Madden case. The amendments were instituted to target a 2015 decision, Madden v. Midland Funding, LLC (see Banking and Finance Law Daily, May 26, 2015). In that opinion, the Second Circuit rejected the valid-when-made principle and said that a debt collector collecting a consumer debt in New York was limited to the interest rate permitted by New York law. The interest rate export privilege the National Bank Act gave to the national bank that originated the credit did not preempt the state usury law, the court said.

Comments on proposal. The OCC received several comments on its proposed regulatory text. According to the notice, commenters requested several clarifying changes, including recommendations to specifically reference non-bank third parties in the regulatory text; ensure that the rule applies to transfers of partial interests in loans; and clarify that the rule does not affect the applicability of other state law requirements, including licensing requirements. The OCC stated that it does not believe any changes to the regulatory text are necessary to address these recommendations because the OCC reads the regulatory text to be consistent with these recommendations.

Additionally, several commenters argued that the OCC and the FDIC should coordinate and harmonize their respective regulatory texts, which will help minimize any differences in court decisions. The OCC responded that its proposed regulatory text was narrowly tailored to address the specific legal uncertainty created by Madden. The OCC has adopted the rule as proposed. However, the OCC did note that it intends that its rule will function in the same way as the FDIC’s proposed regulatory text.

Response to OCC action. Acting Comptroller of the Currency Brian P. Brooks issued a statement regarding the final rule stating that the rule "supports the orderly function of markets and promotes the availability of credit by answering the legal uncertainty created by the ‘Madden’ decision. Such 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."

Representative Patrick McHenry (R-NC), Ranking Member of the House Financial Services Committee, also commented on the rule, stating "The regulatory uncertainty caused by the ‘Madden’ decision has driven lenders away and hurt the most vulnerable borrowers. The OCC’s finalized Valid-When-Made rule provides clear rules of the road for banks and non-banks, encouraging partnerships that will lead to improved access to credit for millions of Americans, particularly those most in need during this difficult time."

The Consumer Bankers Association also responded, with CBA President and CEO Richard Hunt stating that the association "appreciates the OCC’s efforts to clarify years of uncertainty caused by the Madden case. The final rule is a positive development and will allow the nation’s banks to further fulfill the needs of consumers and continue operating in a safe and sound manner."

Consumer advocacy group Americans for Financial Reform criticized the rule, alleging that it encourages online non-bank lenders to launder their loans through banks "so they can offer high-cost triple-digit loans in states where such loans are illegal." Linda Jun, senior policy counsel of Americans for Financial Reform Education Fund, stated "The OCC is making it easier for lenders to ignore state protections put in place to prevent the harm caused by unaffordable high cost loans. Congress needs to stop these abuses by capping sky-high interest rates nationwide."

Companies: Americans for Financial Reform; Consumer Bankers Association

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