Proposal aims to clarify ‘valid-when-made’ rule made murky under Madden decision

An interest rate on a consumer loan purchased from a bank by a nonbank would continue to be valid after the loan is transferred, essentially overturning the so-called “Madden decision,” the federal regulator of national banks said Monday.

In a release, the Office of the Comptroller of the Currency (OCC) said that it and the Federal Deposit Insurance Corp. (FDIC) are seeking comments on the proposed work-around  for the Madden decision (a ruling reached by the U.S. Court of Appeals for the Second Circuit in Madden v. Midland Funding, LLC).

“This proposal will address confusion about the effect of a transfer on a loan’s valid interest rate, including confusion resulting” from the Madden rule, the OCC said.

“This rule would clarify that when a bank sells, assigns, or otherwise transfers a loan, interest permissible prior to the transfer continues to be permissible following the transfer,” the summary of the proposal states.

The summary states that federal law establishes that banks may charge interest at the maximum rate permitted to any state-chartered or licensed lending institution in the state where the bank is located. It also notes that federal law provides banks “with the authority to enter into and assign contracts.”

“Well-established authority also authorizes banks to sell, assign, or otherwise transfer loans. Despite these clear authorities, recent developments have created uncertainty about the ongoing validity of the interest term after a bank sells, assigns, or otherwise transfers a loan,” the proposal summary states.

If ultimately adopted by the two banking agencies, the proposal would clarify the “valid-when-made” rule, which some say the Madden decision made murky.

The proposal would apply to all national banks and state and federal savings associations, the OCC said. Comments will be taken for 60 days. The FDIC is also expected to release a proposal, the OCC indicated.

OCC Proposes Rule to Clarify “Valid When Made” Doctrine

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