December 03, 2019

MONTH-IN-BRIEF: Business Regulation & Regulated Industries

Lynette Hotchkiss

Banking Law

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.

Lynette Hotchkiss

EVP/General Counsel & Corporate Secretary; Rabobank, N.A

Lynette Hotchkiss is EVP/General Counsel & Corporate Secretary for Rabobank, N.A., where she also previously served as Associate General Counsel. Prior to joining Rabobank, Lynette was with OneWest Bank, N.A, where her responsibilities included monitoring and reporting on regulatory developments impacting the bank’s operations and providing legal support for regulatory compliance matters. Before that, Lynette was an attorney in the Financial Practices Division of the Federal Trade Commission, where she focused on mortgage servicing issues. For much of her career, Lynette used her knowledge and experience in consumer finance laws and regulations to build compliance tools to help financial institutions comply with the complex array of federal and state requirements, first acting as the lead compliance attorney at CFI ProServices Inc. (now Finastra) to develop the Laser Pro® loan documentation system and later leading the legal team at Mavent Inc. (now part of Ellie Mae) to develop the Mavent Expert System, an automated compliance system for mortgage origination.