U.S. Federal Banking Regulators Propose a Madden Fix
By Jai R. Massari, Davis Polk & Wardwell LLP
Since the 2016 Second Circuit decision in Madden v. Midland Funding, LLC, banks and their non-bank lending partners have faced legal uncertainty about their ability to assign or transfer loans. The Madden decision and subsequent actions by state courts have called into question the “valid-when-made” doctrine, which stands for the proposition that a loan that is valid at its inception cannot become usurious upon a later sale or transfer to another person. The Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) have proposed a Madden fix. The legal underpinning for this fix is a recognition that the statutory authority for banks to make loans inherently carries with it the authority to assign and sell loans – without an otherwise permissible interest rate becoming impermissible upon assignment or sale.
The OCC’s proposal, remarkable for the brevity of its rule text, would amend existing regulations that govern permissible interest rates for national banks and federal savings associations to provide that “[i]nterest on a loan that is permissible . . . shall not be affected by the sale, assignment, or other transfer of the loan.” The FDIC’s proposal would create new regulations under Section 27 of the Federal Deposit Insurance Act (FDIA). The proposal would provide that “[w]hether interest on a loan is permissible under section 27 of the [FDIA] is determined as of the date the loan was made”—not when an interest payment is taken or received. The permissibly of that interest rate would not be affected by subsequent events, including (among other events) the sale, assignment, or transfer of the loan. The FDIC’s proposal is also an excellent walk through the history of how the federal government, via court cases and legislation, came to regulate interest rates. Both proposals are subject to a 60-day comment period and are likely to generate a vigorous debate.