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The OCC finalized a rule addressing legal uncertainty about the ongoing permissibility of an interest term after a bank transfers a loan. The rule clarifies that a national bank may transfer a loan without impacting the legality or enforceability of the loan's interest rate, provided that the interest rate on the loan was valid when made by the bank.
According to the OCC, the final rule resolves the legal uncertainty created by the U.S. Court of Appeals for the Second Circuit as a result of its 2015 decision in Madden v. Midland Funding. The final rule reaffirms the "valid-when-made" doctrine, a long-standing lending law principle providing that the interest rate on an assigned loan made by a national bank is legal after assignment if the rate was legal at origination.
As previously covered, the U.S. Court of Appeals for the Second Circuit had ruled in Madden that the application of state usury laws to third-party assignees is not preempted by the National Bank Act (see previous coverage). Under the Madden decision, non-bank assignees would become subject to state usury limits. The decision notably rejected the "valid-when-made" doctrine, which, in turn, prompted the OCC's issuance of the final rule. (See Cadwalader Clients and Friends Memoranda.)
The OCC noted that the final rule does not address which entity is the true lender when a bank makes a loan and assigns it to a third party, stating that the question of the true lender is a question outside of the scope of the OCC's rulemaking.
The final rule, which applies to all national banks and state and federal savings associations, will go into effect on August 3, 2020.
Originally published June 02, 2020
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