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The OCC proposed a new rule clarifying that the transfer of a loan from a national bank to another entity does not affect the legality of the interest rate on the loan, so long as the interest rate on the loan was valid when made. The new rule is intended to end the legal uncertainty created by the 2015 decision in Madden v. Midland Funding, LLC.
As previously covered, the U.S. Court of Appeals for the Second Circuit ruled in Madden that the application of state usury laws to third-party assignees is not preempted by the National Bank Act. Instead, such assignees remain subject to state usury limits. The decision notably rejected a long-standing principle of lending law known as the "valid-when-made" doctrine, which provides that an assigned loan's interest rate is legal after assignment if it was legal at origination. The Madden decision has been a matter of significant ongoing controversy (see previous Cadwalader memoranda).
According to the OCC, the new rule will codify the fact that a legal interest rate on a loan originally made by a national bank remains legal after the transfer of the loan by the bank.
Comments on the proposal must be submitted within 60 days after the date of its publication in the Federal Register. The OCC noted that the FDIC intends to issue a similar proposal.
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