The OCC Finalizes “Madden Fix” Regulation, Codifying the “Valid-when-Made” Doctrine as Applicable to Loans Made by National Banks and Federal Savings Associations

On Friday, the United States Office of the Comptroller of the Currency (“OCC”) finalized a regulation regarding the “Permissible Interest on Loans that are Sold, Assigned, or Otherwise Transferred” by national banks and federal savings associations. Initially proposed in November 2019, the regulation provides that interest on a loan that is permissible under provisions of federal banking laws establishing the interest authority of national banks and federal savings associations is not affected by a sale, assignment, or transfer of the loan—effectively permitting subsequent holders of loans originated by OCC-regulated entities to take advantage of the originators’ “Interest Exportation Authority.” The rule will be effective 60 days after publication in the Federal Register.

The OCC’s action represents a long-awaited next step in the national fallout from the Second Circuit’s 2015 Madden v. Midland Funding decision, which called into question the ability of purchasers of bank-originated loans to continue to charge interest at lawfully contracted-for rates. In Madden, the Second Circuit determined that National Bank Act preemption standards that typically protect national banks and federal savings associations from the application of state laws that “significantly interfere” with full exercise of their banking powers under federal law did not prevent the application of state usury laws to a non-bank purchaser of a bank-originated extension of credit. Many industry participants disagreed with the Madden outcome, which they viewed as taking too narrow a view of federal preemption and disregarding non-preemption bases for concluding that a purchaser should be entitled to enforce a validly-originated loan according to its terms (the “valid-when-made” doctrine). Nevertheless, state regulators and private plaintiffs brought usury claims—some of which remain pending—against lending programs involving the sale of bank-originated loans in the years following the Madden decision. For example, last year, two class action lawsuits were filed against the credit card securitization programs of two national banks alleging that the securitization entities purchasing receivables from the national bank were not permitted to collect interest at the rate charged by the national banks under Madden. Addressing underlying policy concerns and ongoing Madden litigation/enforcement, the OCC is now codifying the valid-when-made doctrine as a matter of federal law for loans originated by national banks and federal savings associations, and justifying its rulemaking, in part, by establishing that several other bank powers (including the Interest Exportation Authority and separate powers to enter into contracts and to sell, assign, or transfer loans) combine to support the proposition that the permissibility of the interest rate on bank-originated loans is not affected by subsequent transfers. The move follows industry efforts to mitigate Madden’s adverse effects on lending programs, including lobbying efforts by the Structured Finance Association through a task force for which Mayer Brown attorneys were among the co-chairs.

The OCC’s rule is a positive development for those seeking regulatory certainty for the secondary market in bank-originated loans and defending Madden claims. However, there are still important issues to be resolved before Madden and related litigation can be put to rest for good. First, the OCC’s rule may be challenged by state regulators or private plaintiffs, such that we may not have a final answer on its validity or scope for some time. Second, the Federal Deposit Insurance Corporation (“FDIC”) is still in the process of finalizing a companion proposal that would apply to loans originated by state-chartered, FDIC-insured banks, and that would address not only a “Madden fix,” but also broader issues as to the interest-related authorities of state banks. Now that the OCC has acted, one would expect the FDIC to act in relatively short order, though the breadth of the FDIC’s rulemaking requires some additional analysis by the FDIC.

Finally, we note that neither the OCC rule nor the FDIC proposal would address the related-but-distinct “true lender” issue (i.e., whether, in any given program involving a bank loan being acquired by a non-bank entity, the bank is the true lender such that the Interest Exportation Authority applies in the first place). While there have been attempts to reach legislative or regulatory resolutions to the “true lender” issue in the years since Madden, those efforts have not yet resulted in any changes to federal law that would clarify standards that should be applied to determine the true lender in litigation or enforcement against bank partnership programs.

Notwithstanding open questions, the OCC’s rule makes it clear that the lawful interest rate does not change when a purchaser acquires a loan originated by a national bank or federal savings association. Purchasers have the authority to charge interest at rates that were permissible for the originator; and state regulators, private plaintiffs, and courts should accept that the authority to sell a loan that retains its contracted-for interest rate after sale is a banking power recognized under federal law.