The federal insurer of bank deposits Tuesday proposed its own regulation to clarify the “valid-when-made” rule for state banks, an action taken by its sister regulator, the supervisor of national banks, the day before.
The Federal Deposit Insurance Corp. (FDIC) Board issued the proposal at its meeting in Washington, D.C., Tuesday. The proposal, the FDIC said, would “codify legal guidance the agency has relied upon for more than 20 years regarding interest rates that may be charged by state-chartered banks and insured branches of foreign banks.”
The agency said its proposal (like that made by the Office of the Comptroller of Currency [OCC] Monday for national banks) is intended to address “marketplace uncertainty in the wake of a 2015 court ruling that called into question the enforceability of interest rate terms following the sale or assignment of a loan originated by a national bank to a third-party non-bank.”
The legal guidance is known as “valid when made.” However, the FDIC noted that the 2015 appeals court ruling (in Madden v. Midland Funding, LLC) said federal interest rate authority does not apply following the sale or assignment of a loan to a non-bank, and this created uncertainty regarding the enforceability of loans originated and sold by state banks.
The FDIC said its guidance is consistent with decades of case law and provides that a permissible interest rate on a loan, as permitted by the law where the bank is located, would not be affected by subsequent events, such as a change in state law, a change in the relevant commercial paper rate, or the sale/assignment/transfer of the loan.
The 2015 ruling, the agency asserted, confused that policy.
The FDIC also noted that, although the proposal does not address which entity is the “true lender” when a state bank makes a loan and assigns it to a third party, the proposal does state that the agency views unfavorably entities that partner with a state bank with the sole goal of evading a lower interest rate established under the law of the entity’s licensing state.
Like the OCC proposal issued the day before, the FDIC proposal was issued with a 60-day comment period.