Rule aims to clarify permissible interest on transferred loans in face of Madden decision

A bank may transfer a loan without affecting the legally permissible interest term, according to a rule issued Friday by the national regulator of banks, addressing what the regulator called uncertainty created by the Madden decision of five years ago.

In what he called his first action as acting comptroller of the currency, Brian P. Brooks said the 2015 decision by the U.S. Court of Appeals in Madden v. Midland Funding LLC created legal uncertainty regarding the centuries-old doctrine of valid when made. He said the final rule he signed Friday “supports the orderly function of markets and promotes the availability of credit by answering the legal uncertainty created by the ‘Madden’ decision.”

Under that ruling, the National Bank Act’s preemption of state usury laws for loans transferred to non-banks was declared void. The ruling muddied the so-called “valid-when-made” rule, which holds that interest rates remain in force when (and where) the loan was made.

Last fall, the OCC issued a notice of proposed rulemaking aimed at clarifying that when a national bank or savings association sells, assigns, or otherwise transfers a loan, interest permissible prior to the transfer continues to be permissible following the transfer.

Brooks said the new rule provides certainty that will allow 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.”

Acting Comptroller of the Currency Statement Regarding the ‘Madden’ Rule